The global macroeconomic keyword for 2024 is, in general terms, “slowness”. While we do not expect a recessionary year for most global economies, it’s unlikely to be a year of solid growth either.

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1. Consumer demand and economic growth

General macroeconomic slowness is something that is not commonly associated with a year ending with a US presidential election, particularly one in which the incumbent president is running for a second term. While “this time is different” is a common phrase used to mock economic prophets pronouncing a breakpoint in the economic laws due to a new era starting, this year might actually be different.

Unsurprisingly, US economic growth is likely to beat European growth, but due to the era of high inflation and the still elevated levels we’ve recently seen along with the rapid rise in interest rates, the economy is still moving ahead in slow motion. A lack of investment is one major cause.

The European economy is likely to suffer from high inflation even more as it has gotten used to extremely low interest rates during the previous decade and now the ECB remains, at least rhetorically, persistently more hawkish in its rate policy than its US counterpart.

Consumer demand makes or breaks the US and European economies. It has helped these economies so far and it is the top factor to analyze this year. The focus should be on consumer spending instead of consumer sentiment due to the reported disparity between reality and feeling indicators.

The economic outlook for China is connected to both of the above-mentioned economies, as China is the key provider of many goods consumed globally, and lower consumption can reduce Chinese growth as well. For China, the key factor determining its economic surprise potential is still its domestic consumer demand and investment. If Chinese consumers start spending, the economy should gain support, which could create positive momentum and investment, depending on the strength of demand.

2. Renewable energy and the unexpected risk factor

Why should one expect the unexpected? Because the global macroeconomic state is also prone to some significant risks – some positive but unfortunately most of them negative – and the negative risks are not only macroeconomic risks.

As evident from any news outlet, geopolitics have climbed to the top of the agenda, and they pose significant risks to the global economic performance. Escalation of tensions in the Middle East and Russia’s continued warfare and belligerence, just to mention the obvious, have the potential to impact regional and global economies negatively. And once one crisis is (somewhat) settled, or at least supply chains are reorganized to cope with the impact, another is fully primed and waiting around the corner. Every emerging crisis has the potential to stall the already slow performance.

That takes us to the positive risks, which unfortunately are not connected to the de-escalation of the current crises. One of the key levers for economic performance in both the US and Europe – and, of course, in China as well – is consumer spending. With interest rates still relatively elevated, consumer spending has been somewhat subdued, but any drop in rates could alleviate this economic pain and also have a knock-on effect on the economy. It’s worth noting that while economic growth is relatively slow, and consumer sentiment, in particular, is poor, employment numbers are solid, so consumer demand has been the one-factor keeping growth positive or at least flat. Anything that could change consumer behavior would be one of the “unexpected.”

3. India’s global expansion

This could also be the year that India, the world’s most populous nation, expands its role in the global economy. There are indications that India might start to take a stand in the maritime transport threat seen in the Arabian Sea. If so, this could be a step toward gaining a larger economic role as well. With high growth rates and a very large population, the economic growth potential of India is significant, and while it all comes down to domestic political decisions, there is a chance that India could become a large source of global economic growth from 2024 onward.

In conclusion, three things to watch in 2024

In this analysis, we’ve explored the macroeconomic outlook for commodity markets in 2024, identifying three areas to pay close attention to this year.

Consumer demand remains a crucial factor in the US and European economies, with a focus on spending rather than sentiment. The role of renewable energy and electric transportation could be pivotal in the global economy by 2024. Despite tensions in the Middle East, global benchmark oil prices have remained stable, indicating the potential impact of renewables. India’s growth also holds significance in shaping the global macro economy in 2024 and beyond.

Want to understand how commodity market trends affect the pricing of fast-moving consumer goods? Fastmarkets’ FMCG suite provides valuable insights to improve your purchasing decisions and supplier negotiations. Reach out to us today to learn more!

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In this fast-moving market, having the right insights and data is crucial. It helps businesses make smart decisions, strengthen their automotive supply chains and stay ahead in the tough battery materials market.

Use our checklist for procurement specialists in the automotive market to make a full assessment of the health of your supply chain, identify potential gaps and see how our solutions can help you navigate this competitive landscape.

Do you have visibility over supply and demand forecasts for strategic planning?

Gaining an insight into battery material price movements, as well as supply and demand dynamics is a significant advantage for any organization. The price of key battery materials remains volatile. The lithium price in particular has seen some significant declines this year.

With experts embedded in this market providing price data and market intelligence, you can stay ahead in this ever-evolving market.

Are you looking at other alternatives to diversify supply?

Battery recycling and black mass can diversify your supply of battery materials by providing alternative sources of raw materials. It can also help you meet your tough ESG goals. The recycling market has seen significant investment recently and accounts for 5% of total battery metal production.

Of the total material supplied to the market in 2023, 5% of cobalt came from battery recycling, 6% of lithium carbonate equivalent (LCE) and 1% of nickel. Fastmarkets forecasts secondary supply to increase to 12%, 7% and 5% respectively by 2033.

The Fastmarkets Battery Recycling Outlook includes 10-year battery supply and black mass price forecasts to give material manufacturers, battery makers, automakers and battery recyclers the insights and forecasts to understand and leverage the increasing recycled supply. 

Are you able to set accurate cost expectations by keeping up with price changes?

Receiving daily updates on price data helps you understand the current value of raw materials, which in turn forms the basis for buying, selling and trading strategies.

Fastmarkets forecasts that cell costs will continue to come down in the short-term. Nickel, cobalt manganese (NCM) 811 and lithium iron phosphate (LFP) both have the potential to reach below 70 dollars per kWh on the cell-level by 2029. However, beyond this point, there is a risk of constrained supply pushing costs back up. 

The Fastmarkets Battery Cost Index tracks and offers key insights into the cost of cathode active materials (CAM), anode materials and chemistries across different regions. 

These are just some of the questions in our checklist for procurement. Find out how you’re performing and where the gaps are. Our battery material outlooks and forecasts will provide you with all the data and analysis you need to find procurement success.

The post The automotive supply chain: A guide to strategically sourcing raw materials appeared first on Fastmarkets.

As a producer or consumer of physical commodities, you likely engage in procurement or sales with physical contracts tied to a physical benchmark.

In many instances, each party might request specific criteria written into a physical contract that will allow them to mitigate price risk and avoid an unforeseen situation. These criteria act as an insurance policy.

How a commodity index is embedded in a physical contract

An insurance policy is similar in many ways to an option. You pay a premium for a specific payout. Before describing how these embedded physical contract options can be monetized, discussing how commodity indexes are used in physical contracts might be helpful.

A commodity index is typically embedded in physical contracts through a pricing mechanism. In physical contracts, commodities, such as lithium hydroxide or lithium carbonate, are traded based on their underlying index, which serves as a benchmark for pricing and settlement. The index represents the average value of trades that occurred in the market over a specific period.

When a commodity index is embedded in a physical contract, the contract’s pricing or settlement is tied to the index’s average price. This linkage allows parties involved in the contract to have exposure to the overall movement of the commodities represented by the index.

For example, if you have a physical contract for purchasing lithium hydroxide, instead of fixing the price solely based on the spot price of lithium, you could use a commodity index like the Fastmarkets lithium hydroxide monohydrate 56.5% LiOH.H2O min, battery grade, spot price cif China, Japan & Korea, $/kg as a reference. The contract’s terms might stipulate that the price will be a certain percentage above or below the index’s value at the time of settlement to incorporate transportation duties or taxes.

By using a commodity index in physical contracts, participants access a standardized pricing mechanism that reflects the overall market conditions for a particular commodity.

How does a commodity index work in a physical contract?

Discussing a theoretical case study helps describe the potential monetization of embedded physical contract options.

Cathode Corporation ABC agreed to purchase lithium hydroxide from New Energy Production Company XYZ. The deal stated that the price Cathode Corporation ABC would pay New Energy Production Company XYZ each month would be based on the previous month’s average price of Fastmarkets lithium hydroxide index. Cathode Corporation ABC would purchase the same volume each month during the contract’s life, but the average monthly price could not exceed 105% of the prior month’s price.

The clause in the contract that capped the price that Cathode Corporation ABC will pay per month is an option. No matter how high lithium hydroxide prices move during the current month, Cathode Corporation ABC can purchase lithium hydroxide at the prior month’s rate plus 5%.

Cathode Corporation ABC performed some analysis using historical Fastmarkets lithium hydroxide prices. They saw that during the past five years, there was a lot of volatility in the monthly average price of lithium hydroxide. Still, only 23% of the months had month-over-month changes that were more than 5%, and 10% of the months had moves that were greater than 10%. The cap in the price acts like an insurance policy that is embedded in the physical contract.

The monetary value of embedded options

One of the benefits of having caps or floors embedded in a physical contract is that they can be monetized by selling them to another counterparty. If you sell the cap or a floor, you will no longer be insured but receive a premium.

The option premiums are based on several factors. The most fundamental variables include the current price of the underlying asset and the specified price (the strike price) at which the option holder has the right to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset.

The remaining time until the option contract expires and volatility, which is a measure of how much the price of the underlying asset fluctuates.

Higher volatility generally leads to higher option prices because the option is more likely to be profitable.

Additionally, the rate of return without any price risk is typically derived from government bonds or similar instruments. It affects the cost of holding the underlying asset and is used in some option pricing models.

Cathode Corporation ABC has to determine if the cap is worth holding or if receiving cash would be more beneficial. For example, if you can pass the price on to your customers, you might not need the cap and be willing to sell it. The cap Cathode company owns as part of their physical contract is a form of commodity hedging.

Additional strategies and embedded options

An alternative strategy might be to hold only part of the insurance. Cathode Corp might decide to sell a cap that is 10% out of the money to receive some options premium but still be protected if the price of lithium hydroxide rises by more than 5% and up to 10% month over month. This options strategy is called a call spread, a partial insurance policy. The same concept can be used for floors.

In this theoretical payout profile, where the current price of lithium hydroxide is $18/KG, Cathode Corporation ABC might receive $0.30 of premium by selling a 10% out-of-the-money call options and have protection from $19/KG (5% out of the money, which is embedded in their physical contract) to $20/KG (which is 10% out of the money). Above $20/KG, they would not have any protection if the price rose more than 10% during a month.

In this theoretical payout profile, where the current price of lithium hydroxide is $18/KG, New Energy Mining Corporation XYZ might receive $0.30 of premium by selling a 10% out-of-the-money put options and have protection from $17/KG (5% out of the money) to $16/KG (10% out of the money). Below $16/KG, they would not have any protection if the price declines by more than 10% during a month.

While caps and floors might be popular in physical contracts, other options have names such as look-back pricing, extendables, escalators or de-escalators. You might find wording describing the right to extend your purchase at a specific price. The value of these embedded options can be monetized if you have an idea of their value and have a willing counterpart who will purchase these options.

The bottom line

The upshot is that an embedded option within your physical contract has a monetary value. It’s essential to understand options to monetize this value and have someone to pay for the option. While each option is unique, you might find a counterpart willing to purchase your embedded option and provide you with a premium that will allow you to unlock some of its value.

If you are interested in determining the value of your embedded options or learning more about hedging, feel free to contact our risk solutions team.

The post Why your physical procurement contracts might be worth more than you think appeared first on Fastmarkets.

At a Forest Products conference earlier this year, we invited a panel of packaging buyers to discuss their perspectives on:

• The challenges brought by changing consumer behaviors
• The viability of fiber-based solutions as primary packaging
• The potential of molded fiber technology in the packaging space
• The importance of transparency in understanding costs and operations for buyers and suppliers
• The evolving definition of sustainable packaging

What are the biggest challenges for packaging buyers in recent years?

The discussion between the three packaging buyers centered around the challenges of supply assurance, the necessity of agility and responsiveness, and the importance of innovations in affordable sustainable solutions.

The aftermath of the pandemic prompted the need for supply assurance. Companies need agility and flexibility to adapt to the evolving market dynamics and supply chain challenges that persisted beyond the pandemic.

They also believe that being able to respond to sudden market changes is also crucial for success in today’s highly competitive and dynamic market. One example of this is the profound impact of social media trends on consumer behavior. The so-called “TikTok effect” saw products rising and falling in popularity in an erratic fashion, with anticipated sales often being overshadowed by unexpected breakout stars. The ability to swiftly launch new products, embrace frequent brand refreshes and accommodate brand turnovers are integral to business success in an ever-evolving marketplace.

Sustainability is another key area of focus, not only due to ESG needs but also in response to a growing interest from our younger, more environmentally conscious audience. Clear communication about the recyclability of paper-based products is vital for educating consumers and stakeholders.

How do you see the future of primary packaging?

Our packaging buyers’ visions for the future of primary packaging are clear: more sustainability, and less waste.

For many sectors, there is a shift away from traditional plastic packaging towards paper-based alternatives. There are commitments to ensuring recyclability, using more recycled materials and reducing excessive packaging. One of the examples given is the phasing out of gift boxes for products below a certain price point, as well as making sure that all packaging materials are made to be fully recyclable and not mixed.

For our brands dealing with liquid products, such as shampoos and perfumes, using fiber-based primary packaging is a real challenge. The packaging must meet specific requirements, such as ensuring durability throughout its shelf-life, integrity during transportation and resilience in the humid environment in which they are often used and stored.

Despite the challenges, our packaging buyers are enthusiastic about the possibilities and are eager to explore creative solutions in this area with willing partners.

When it comes to secondary packaging, do you prioritize virgin or recycled materials?

Where secondary packaging is folding boxboard or cartonboard boxes, the challenge lies in making recycled material boxes as visually appealing as those crafted from virgin materials. This is especially true of more high-end products, where there is a certain expectation and perception of how the products should be presented, said our panelists.

Besides aesthetics, the printability and resistance of recycled paper boxes have posed challenges. One of our speakers said that they found that they had to increase the grammage of their boxes to achieve the same resistance with recycled materials. With targets to reduce their packaging intensity, they found little incentive to transition their folding boxes from virgin to recycled material.

Where secondary packaging, or in some cases tertiary packaging, is corrugated boxes, all three buyers said they generally accept both virgin and recycled material-based options. The choice of which to use may vary depending on local market preferences or the characteristics of the product. For instance, heavier products often opt for kraftliner boxes as they provide better structural integrity and durability.

But do we need the corrugated box? When speaking about the necessity for secondary packaging in transporting products, some companies have already started to challenge themselves as part of their attempt to remove excessive packaging.

One option they have explored is establishing a closed-loop system where plastic boxes are sent to and returned from retailers. They are also working with their partners on a project to develop a robust solution that eliminates the need for a corrugated box when selling to retailers.

What do you think of the potential of molded pulp in packaging?

Molded fiber technology presents an exciting frontier in packaging solutions for our group of speakers. This technology allows for experimentation with various shapes, designs and finishes, adding an element of aesthetic appeal to the eco-friendly package.

Given that existing product bottling lines are already functioning efficiently, the speed and efficiency of these molded fiber packaging production lines will play a pivotal role in their adoption. Being able to scale up production is also key to this becoming an accessible and practical solution.

Molded fiber packaging also has potential in secondary packaging, where it could replace or combine inserts and dividers that are currently used in boxes, with indentations at the base to secure products. A panelist shared their experience of developing a custom molded fiber folding box for a limited-edition product. This innovative design incorporates 3D printing for aesthetics and practicality during transportation.

Do you feel you have a good understanding of your suppliers’ costs?

All of our panelists feel that they have a good level of understanding of the complexities within the supply chain, including the fundamental costs associated with materials, labor, energy, and more. However, they feel there is a need for greater transparency in the supplier-buyer relationship.

For example, while they recognize energy costs as part of their operational expenses, they are unaware of the full extent to which energy impacts their suppliers’ overall operations. As a result, the sudden increase in energy costs last year caught them by surprise. By improving transparency within the partnership, they can gain a deeper understanding of the factors that influence costs and subsequent price fluctuations, as well as anticipate future challenges. Being able to help with forecasting and anticipating risk, they said, is extremely important for packaging buyers.

The conversation needs to extend to having a mutual understanding of the cost drivers for both parties. This involves analyzing the effects of inflation on consumer spending and revenue, exploring strategies to examine end-to-end costs and finding innovative ways to reduce costs and optimize operations.

What is considered sustainable packaging for buyers?

With the abundance of sustainable packaging options and definitions in the market today, it can be difficult to determine what it really means. For example, while some are moving towards substituting plastic packaging for paper-based options, others suggest that recycling and reusing existing plastic materials could also be a more viable option.

For this reason, paper packaging companies should be mindful that there is a risk of being out-competed by other packaging materials, said our panelists. Industries like glass and plastic, which are actively pursuing sustainable innovations, are also striving to develop eco-friendly solutions. While fiber-based packaging is certainly a viable option, it’s just one of many choices available to companies today.

They also believe there is no “one correct answer”. Instead of completely eliminating certain types of packaging material, looking at sustainability holistically and being open to different solutions is key. As with any new technology or innovation, the challenge lies in finding a balance between cost, speed of adoption and widespread acceptance.

Interested in more insights from packaging buyers? Head to our dedicated procurement hub for more articles and learn more about how we are helping those in the FMCG industry to overcome the business risks associated with volatile packaging markets. 

The post Navigating the new age of packaging: What’s on the minds of packaging buyers today? appeared first on Fastmarkets.

In this article, we will take you through what makes up the cost of a paper packaging product and demonstrate how the price of your product can change quickly over time using price and cost indices.

What makes up the cost to produce a paper packaging product?

To simplify, the cost to produce paper packaging can generally be separated into three broad categories:

1. The cost of the paperboard used as the base material for the paper packaging. This can differ depending on the type of packaging you are making (e.g. corrugated packaging and folding carton would use different base material).
2. The conversion process of making the paperboard into paper packaging. This can differ between each producer and their mill setup (e.g. machines used and production efficiency).
3. Overheads, profits and other costs not included in the above.

The largest and most variable cost for producing paper packaging is in the paperboard material that makes up the bulk of the product. Changes in the value of the paperboard material can be estimated by using:

• The market price at which the paperboard is sold. Generally, the higher the market price at which the paperboard is sold, the more it will contribute to the cost of the final box. The market price is influenced by market conditions at the time (i.e. supply and demand of the paperboard).
• The cost to produce the paperboard. Generally, the more expensive it is to produce the paperboard, the higher price the paperboard should be sold at. This will influence your final box price.

By modelling the market price of the paperboard and the cost to produce the paperboard, we can work out how paper packaging prices should evolve over time.

Modelling paper packaging cost evolution with price and cost indices

Our index builder model calculates how the cost of producing the paper packaging should have evolved in relation to the changes in the two factors mentioned above – the market price of the paperboard material using our price data (the price index) and the cost to produce the paperboard material based on information from our cost benchmarking tool, Analytical Cornerstone (the cost index).

In our example, we will demonstrate the volatility in prices and costs by focusing on the cost evolution of corrugated packaging in Europe using two types of containerboard – recycled liner and recycled medium – as the paperboard material and a starting point of EUR100 per 1000 pieces from 2020 to 2023.

Looking at the market price of containerboard (price index)

Firstly, the model shares a chart that demonstrates how the cost to make the corrugated box has changed based on the market price of the containerboard base material.

It shows that containerboard prices had steadily increased from Q4 2020 and peaked in Q2 2022 at €165.95 per 1000 boxes, with both recycled liner and recycled medium almost doubling in price compared to 2020. The prices somewhat held on through Q3 and fell very quickly again from Q4 onwards, dropping to only €124.54 per 1000 boxes in Q1 2023.

The peak in prices in early 2022 was driven by a tight market where the demand for all grades was strong and mills tried to secure limited supply. This had eased in the latter part of the year with a combination of soaring inflation, weakened demand, uncertainty surrounding the war in Ukraine and the prospect of an energy crisis driving the downward trend in prices.

Looking at the cost to produce containerboard (cost index)

The next chart produced by the model demonstrates how the cost to make the corrugated box has changed based on the cost to produce the containerboard base material. The model takes into account the main cost drivers in a containerboard mill, including fiber, energy, labor, chemicals and others.

The cost to produce the containerboard had increased significantly over this time period, peaking in Q3 2022 at €287.43 per 1000 boxes. However, this had U-turned dramatically in the next quarter and dropped to just €221.72 per 1000 boxes, just over double the cost from the start of 2020.

The main contributors to the dramatic rise and fall in production costs were identified to be energy and fiber. We can delve further into the model to find out what happened here.

Here the model focuses on how energy prices had evolved in this time period and takes into account nine different types, including biofuels, coal, electric, natural gas and others.

At its peak in Q3 2022, the cost had gone from €30.86 to €139.68 per 1000 boxes. The biggest contributor was natural gas, which had seen its cost grow by almost fivefold since 2020. However, by Q4 2022, energy has dropped to €121.68 per 1000 boxes and natural gas has reduced to just over four times the cost compared to 2020.

This reflects the nature in which European paper packaging companies are heavily dependent on natural gas to power their mills. When prices shot up significantly over the last year due to inflation and the war in Ukraine, it drastically increased the production costs of paper packaging products. Energy prices have lowered and stabilized since the peak of the energy crisis, resulting in the drop in production costs we see here.

On the fiber side, the model takes into account four different types of fiber, including old corrugated containerboard (OCC), mixed paper and board (P&B) and others.

Fiber cost leaped in the first half of 2022 and had increased more than fivefold from €15.24 in 2020 to €86.39 per 1000 boxes in Q2 2022. The biggest contributor to this increase was OCC, which had seen its cost contribution increase dramatically at +464%. The slump in fiber costs came abruptly in the next quarter, with the overall cost dropping to €36.32 per 1000 boxes and OCC prices reducing to only +131% from 2020. This downward trend continued in Q1 2023.

These trends match up with the dramatic price changes for OCC we had seen in the past year. Strong demand in the earlier half of 2022 caused the prices to peak at all-time highs, but by the time we got to the latter half of the year, the prices had plummeted with the disappearance of demand.

Comparing the cost to produce with the market price

The last chart from the model brings together the cost and price indices.

It shows that the cost to produce containerboard had risen more than the market prices at which the containerboard had been sold in Q2 to Q3 2022. The largest difference between the two indices was in July 2022, when the cost index was at approximately +287% while the price index was at approximately +161%. At this point, integrated box producers’ margins were squeezed as the input costs were high.

The markets turned very shortly after and both the cost and price indices had started to go on a downward path by Q3 and Q4 2022, thus easing cost pressures for producers.

Take a closer look at what happened to paper packaging prices in 2022 here.

Using index models to help you make informed business decisions

The dramatic changes we had seen in the cost evolution model happened in the space of six months. Not only does it demonstrate the volatility in our markets today, but it also points out why it is imperative for all players in the market to keep on top of the fluctuations in prices and their drivers.

The global economy has shown more resilience in 2023, but the threat of recession, the worsening of the energy crisis, the war in Ukraine and the uncertainty surrounding supply and demand conditions for paper packaging can still turn the tables in the near future.

Our index builder model is a useful tool for you to monitor these changes and understand how prices could evolve. It combines our trusted and benchmarked price data with our industry-leading mill intelligence database and allows you to set up the model to closely resemble your ‘real-life’ scenario. This can provide you with insights into what factors are influencing the price of your paper packaging product, bring more transparency to your supplier/buyer relationship, help you justify prices at the negotiating table and make sure you are paying the right price for your products.

Speak to our team to schedule a demo or find out more about how our cost analysis products can help you. 

The post Paper packaging prices in a volatile market: How to keep on top of changes using price and cost indices appeared first on Fastmarkets.

In normal circumstances, rising costs are usually met with commensurate increases in the price of products to ensure profitability. However, in the last couple of years, the market price for the paperboard material to make the corrugated boxes had not quite caught up with this rise in the cost to produce them. As a result, the integrated box producers were faced with squeezed margins.

This turning point in the market can be illustrated by our index builder model. It calculates how the cost of producing the box evolved based on two different perspectives:

1. The evolution of the prices of the paperboard material using our price data
2. The evolution of the cost to produce the paperboard material using our cost benchmarking tool, Analytical Cornerstone

In our example, we take a look at the cost evolution of corrugated packaging in Europe using two types of containerboard – recycled liner and recycled medium – and a box price starting point of EUR100 per 1000 pieces from 2020 to 2023.

Click through the charts below to see the cost evolution story.

This increase in cost was caused by several macroeconomic and geopolitical drivers, including inflation, the war in Europe, supply chain challenges and Covid-19. Consequently, the price of energy, fiber, labor, chemical and other cost factors had skyrocketed.

While we have moved away from the peaks in 2022 and cost drivers such as energy and fiber prices have become more stabilized, it is important to keep in mind that these market conditions could turn again in the near future. For Europe, there is still uncertainty surrounding energy security for mills and the war in Europe. The appearance of another macroeconomic or geopolitical event could also change the market conditions we see today.

Our index builder model combines our trusted and benchmarked price data with our industry-leading mill intelligence database. It can give you a clearer view of what is happening in the market and, in turn, insights into what factors are influencing the price of your packaging product.

Find out how our index builder model can help you today by speaking to our team or scheduling a demo.

The post Paper packaging price and cost: What happened when production costs surged in 2022? appeared first on Fastmarkets.

Supply chains have suffered unprecedented disruption in recent years. Brexit, the Covid-19 pandemic, the war in Ukraine and a succession of adverse weather events have caused volatility in the price and availability of commodities and products, including those with little history of scarcity or delay.

Although the intense period of disruption has ended, long-term uncertainty persists due to changes in supply chains. Secular super trends such as the energy transition are also fundamentally altering the nature of many markets, which means there will be no return to the pre-Covid approach to procurement.

This disruption has pushed supply chain management to the top of the business agenda and put a spotlight on the role of chief procurement officers (CPOs). Senior executives are increasingly aware of the need to prioritize investment in and support for procurement in order to protect supply chains and ensure business continuity. The aim is insulating the business from volatility as much as possible, mitigating the impact of rising costs and fulfilling delivery schedules.

“CPOs have experienced a huge amount of uncertainty over recent years,” says David Becker, director of the risk solutions practice at cross-commodity price reporting agency Fastmarkets. “Markets have become unpredictable. Prices have whipsawed and input prices have risen well beyond what can be passed on to customers. There has been a growing shift in the methodology needed to do business in the current market environment.”

Fastmarkets has seen how markets in commodities and energy that were relatively stable or slow-moving in the past have become more volatile and now require active management. Peter Hannah, senior price development manager at Fastmarkets, says the markets for the materials used in batteries exemplify the changes that have taken place.

“For example, lithium prices could once be negotiated between a buyer and seller and fixed for up to a year,” says Hannah. “Everyone had more certainty. Now procurement teams have to manage market-orientated pricing mechanisms, which have become necessary to match up supply with demand.”

This is all being driven by secular trends. The global energy balance is shifting away from fossil fuels, toward renewable energy and electrification. Demand for clean energy means that commodities such as lithium, copper and sustainable aviation fuel have a big role to play in the energy transition. The growth of the electric vehicle sector in particular has increased the size and global significance of the market, as well as its volatility. The price gyrations of recent years have required a more dynamic contracting approach, and most supply agreements have evolved to reference spot indices.

“But with that you’re much more exposed to the volatility of the market,” says Hannah. “Fortunately, with this challenge also comes a more effective solution. Exchanges have launched futures contracts for battery materials such as lithium and cobalt, which cash-settle on the basis of the Fastmarkets indices for those products. These financial instruments allow market participants the option to independently lock in future prices, hedging as much or as little exposure as required.

“We see this becoming the norm in many of our markets as they develop,” he continues. “Risk management in less mature markets tends to be more geared around counterparty relationships and sharing the risk burden. Then, as markets mature and become trickier to navigate, the toolkit for doing so often becomes more sophisticated accordingly. This has already played out across bulk materials such as iron ore, and is well under way in battery materials, forest products and biofuel feedstocks.”

Fastmarkets provides access to price data that shows the market-reflective value of each battery material, together with short- and long-term forecasts that give supply/demand balances and help businesses navigate market volatility. For instance, Fastmarkets’ Battery Cost Index gives in-depth insights into the cost of lithium-ion cell components, and a suite of risk management tools helps reduce exposure to price volatility.

The risk management toolkit has recently become much more sophisticated, according to Becker and Hannah. By deploying appropriate risk management tools, including derivatives, CPOs can hedge exposure to future price volatility and protect profit margins. This increases the certainty of cost budgeting and cash flows; improves procurement, planning and inventory requirements; and mitigates counterparty risk.

Evidence of effective risk management also helps to secure financing for new projects or developments. Price reporting agencies such as Fastmarkets can be valuable sources of pricing data, forecasts and market analyses, giving businesses a strategic advantage in complex, volatile and often opaque markets. Commodity markets served by Fastmarkets are critical to the transition to a low-carbon economy, including new generation energy, agriculture, forest products and metals and mining. Access to up-to-the-minute market information, together with market intelligence, helps companies manage their supply chains, while also promoting healthier commodity markets.

“It is positive for CPOs to have access to market information, including spot prices and forecasts,” says Hannah. “But there can always be black swan events or things that you don’t see coming. So, the key thing for CPOs is to have risk management strategies in place.”

Fundamentally, Fastmarkets’ products help businesses understand risks. These may certainly include price risks, but they also likely incorporate counterparty, geopolitical, technological and ESG risks too, to name but a few. Understanding these risks at a granular level is the key to addressing them.

And the insights don’t stop there. Fastmarkets’ products and services can also provide CPOs with risk management pointers, particularly regarding strategies to diversify their sourcing, make their contract structuring more flexible, and use derivative instruments where available.

Becker explains that when carried out effectively, commodity risk management strategies can help to generate a more stable cash flow. That, in turn, can breed greater investor confidence

The value of the business could even increase since investors will enjoy more consistent returns. And effective risk management can also encourage banks to lend more money to grow the business.

These practices used to be the domain of large organisations with substantial resources. But this is changing, given the increased complexity of markets and the development of innovative, effective tools. “It is now possible for smaller organisations to leverage the market information and insight to their advantage,” says Becker. “In many ways, this is even more important for them given the concentrated nature of their business.”

Get your copy of the full report here

The post CPOs diversify their risk management toolkit appeared first on Fastmarkets.

What do you do?

I am a buyer for a large FMCG company, headquartered in Europe. I decide what products we stock, negotiate prices, set retail prices and deliver a profit and loss statement, which I need to deliver throughout the year.

In terms of procurement, I buy the product and the packaging it comes in and make sure it gets to the right place, at the right time.

How has the packaging procurement function changed in recent years? What are the new challenges?

Things have changed massively over last few years. The biggest change now centers around responding to inflation. It’s become a massive part of my role.

It has always played some part, but now it’s the dominant challenge. I am constantly having to try and understand what level of inflation is acceptable, and what is not. If the rises are unavoidable, I need to discover new ways to counter the costs so that I can limit the knock-on effect to the consumer.

Another new challenge relates to the customer and their buying behaviors. Some changes that happened during Covid-19 have remained. There were huge shifts that started in 2020 and although some have reverted, some have stuck.

For instance, many customers will really go for value offers but at the same time will also be strongly attracted towards premium ‘treats’ to compensate for a lack of eating in restaurants. The consumer is always balancing these things out, and then we must respond.

When you combine that with the consumer changes brought on by the cost-of-living crisis, you have a market that keeps surprising you.

Other challenges are to do with freight and shipping delays, plus global warming, which can have a huge impact at the product source.

How do you try and combat the challenge of inflation?

That’s a good question and something we are always working on.

Working out how to minimize impact when you take on extra costs is an art form. There are many activities you can undertake to counteract it. One thing we explore is waste management.

Waste is a huge cost that doesn’t get spoken about enough. If you are really accurate with your ordering and send the right amount of packaged stock to the stores, then that can ultimately save you millions.

What impact do supply chain disruptions have on the work you do and for procurement teams overall?

Cost of freight, for us, has gone up year on year and can have a huge impact on final costs. Any disruptions or threats to freight can be disastrous in my line of work because I must get the timings right or risk affecting the shelf life of products.

From my experience, freight hasn’t quite recovered since Covid-19 for some reason.

Access our special report to learn more about managing packaging procurement risks. 

How is the drive toward sustainability impacting your team and how are you responding to this?

It’s core to the business and we have bold targets around packaging reduction, which everyone has signed up to. The target is in front of us and all of us have to work out how to get to it.

In terms of reaching those goals, I think it’s all about who you work with and choosing the right partners. Make sure they are aligned with your goals and factor that into your plans.

We have looked into using different packaging types, be that: moving away from plastic, or closing the loop and going for recyclable materials. There are also various advisory consultants who will talk to you about best practices.

The challenge with chasing sustainability goals is cost. There are lots of options available to us, such as using different biodegradable materials and close-the-loop services, but there is always a trade-off with cost.

Also, the cost-of-living crisis continues to affect a large number of people, so spending more on a product because it’s in sustainable packaging becomes less of a priority.

It’s hard to say where things are going to fall with customer priorities in the near future. Cheaper packaging is often the less sustainable packaging.

What’s your ideal relationship with paper suppliers?

The best procurement and supplier relationships are those that are as aligned and transparent as possible. I find it’s most productive when both parties can openly talk about the options that are out there.

Relationships can become challenging and fraught when a supplier simply writes out a number and tells you that you have to deal with it. Collaboration and understanding are always better than just passing on a cost without any negotiation or support.

No one can put their fingers in their ears and pretend that inflation isn’t a problem. If suppliers raise prices too much they can be affected too as people won’t buy from them in volume.

This relationship is a two-way street and there must be a balance. To take advantage of this situation, from a supplier perspective, is short-sighted as the market might not always be on their side.

In the next couple of years, the energy crisis might start to die down, so the shoe could be on the other foot to some degree. It’s a short-term view if they over-inflate.

A good supplier of packaging will always have the same goals as you. There should be a balance of input from them.

Interested in more insights from buyers in the FMCG space? Head to our dedicated FMCG hub to learn more about how we can help you overcome the business risks associated with volatile raw materials markets.

The post Private Papers: Confessions of an FMCG packaging procurement professional appeared first on Fastmarkets.

Are supply chain challenges showing signs of abating?

Supply chain challenges are certainly showing signs of abating, but we are in the very early innings of that process. Once the supply chain gets backed up, there’s only one way out of it – one carload, or one truckload, at a time. It is not going to be an easy or quick process and we are a long way from being back to a ‘normal supply chain experience’.

We are not anticipating the situation to normalize in the supply chain, particularly on the rail side, until the second quarter of 2023.

At the same time, there are a lot of things between now and then that can alter that calculus and make the process take longer or shorter. For example, the economy going into a deeper recession sooner could help the supply chain normalize. But using the analogy ‘losing weight by getting food poisoning’, while you are grateful for the weight loss, you would have wished to do it another way. Assuming that the economy stays on the current path, we will unlikely see real stabilization until the middle of next year.

What changes must companies consider relating to high transport costs?

The top priority with regard to high transport costs is to consider how to lower these costs and prioritize what you value.

For example, a forest products rail shipper that values consistency in deliveries will need to consider where to spend their capital to stay on rail, whether it is making some modal choices or facility changes. Capital investments will be needed to either make facility improvements to fit the new 60-foot cars from the national box car fleet, or to purchase a new fleet of 50-foot cars that better suit your needs and have more control over them.

What is the next big challenge for the freight transportation industry?

Labor is the biggest challenge across all modes. We are facing problems getting and retaining enough employees to effectively move a freight network.

On the rail side, the number of operating employees, such as conductors and engineers that are moving the freight on a day-to-day basis, has not changed since October 2020. This means the carrier companies are just about keeping pace with the number of employees they lose.

This is not a good sign for three reasons:

1. The carriers do not have the manpower to keep up with freight demand, which has grown coming out of the pandemic. The lag in getting qualified employees into the system is affecting their ability to deliver supplies and finished goods effectively. There is currently no sign that the carriers are moving out of this anytime soon.

2. We are going into a seasonally difficult period due to winter weather disruptions. The natural headwinds will make it problematic for the carriers to maintain, let alone improve the current service levels. Even if the carriers managed to add headcount, this may not translate into better service.

3. Recruitment is difficult for supply chain roles. The lifestyle challenges of supply chain jobs make them unattractive for college graduates, so the industry must come up with ways to deal with these so we are not perennially talking about labor issues as a constraint to how much volume can be moved through the American freight system.

Learn more about the wider impacts of supply chain challenges here, or take a look at our short- and long-term forecasts to uncover how these challenges are impacting different grades within the industry and how this can affect the inventory and price.

The post Supply chains: Recovery, costs and challenges ahead in 2023 appeared first on Fastmarkets.

Packaging buyers have had to deal with high and volatile prices for the past couple of years, stemming from skyrocketing production costs, disruptions in the supply chain and high transport costs. As a consequence, packaging buyers are struggling to prepare their budgets and forecasts and sometimes have to adapt their packaging needs by postponing production or by temporarily switching to other materials. Obviously, inflation in the packaging segment also contributes to higher prices for consumers, which, when tallied up with rising costs across the board, ultimately lowers demand and erodes margins.

In Europe in particular, skyrocketing gas and energy prices are forcing some paper mills to temporarily halt production, and this will further tighten the market, increase lead times and possibly bring further price increases.

In this special report, “How paper packaging buyers are managing procurement risk”, we will look at how big multi-national FMCG companies across Europe and North America are being affected by and responding to this complex set of procurement risks. To do so, we spoke to a number of senior procurement managers across the profession, representing different sectors, to understand how they are dealing with the many challenges the market has thrown at them in the past couple of years.

What’s inside this special report?

• Candid conversations with senior procurement professionals working for some of the world’s biggest buyers of paper packaging
• Five of the most effective procurement risk mitigation strategies, according to our interviewees
• A look at how packaging buyers prepare for win/win price negotiations
• And much more

Click here to get your copy

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