PPI Up 8.8% and Scissors Gap at 7.7%: Why Packaging Firms Are Exiting as Raw Material Costs Soar

"Raw material costs have climbed so ferociously that we can no longer afford to run orders even when they are handed to us," said one carton plant owner, speaking with visible bitterness after deciding to shut his own factory down.

Looking back at 2020, the packaging and printing sector cut its workforce substantially and lifted production efficiency noticeably, yet rising raw material prices still left listed players with broadly negative gross margin growth.

If even listed firms with deep cash reserves and real bargaining leverage in raw material purchasing could not escape unharmed, the pain felt by the industry's small and mid-sized packaging businesses was bound to be far sharper. Against steeply climbing raw material prices, a run of companies that had expanded too fast with too little capital in reserve went under one after another.

On June 21, the People's Court of Lianshui County in Jiangsu Province issued a notice to recruit an administrator for the bankruptcy liquidation of Huai'an Fangzheng Packaging Co., Ltd.

On April 21, Henan Huali Paper Packaging Co., Ltd. announced that the bankruptcy assets of its two subsidiaries, Xinjiang Huali Packaging Co., Ltd. and Hubei Huali Packaging Co., Ltd., would be publicly auctioned in May.

In May, the Liangqing District People's Court of Nanning accepted a compulsory liquidation case involving Nanning Rongteng Carton Packaging Co., Ltd.

On February 8, the People's Court of the Zhengzhou Airport Economy Zone in Henan ruled that Henan Xindoucai Printing Co., Ltd. and Zhengzhou Feitian Chuangye Technology Co., Ltd. be consolidated into bankruptcy liquidation.

On February 5, the Shanghai Third Intermediate People's Court ruled to accept the compulsory liquidation case of Shanghai Shenglong Packaging Plate-Making Color Printing Co., Ltd.

Having barely scraped clear of the 2020 price wave,

the industry was struck by the 2021 raw material surge with even greater force, cresting in February and March.

Because the increases over the past year or so came from monetary inflation rather than demand, they are profoundly irrational — even destructive.

On July 9, the National Bureau of Statistics published its June CPI and PPI data: PPI up 8.8% year on year and CPI up 1.1% year on year,

leaving the scissors gap between the two as wide as 7.7%, level with the historic high recorded in May.

This shows that upstream raw material price increases can no longer be passed downstream, leaving the packaging industry at the waist of the chain squeezed like a sandwich biscuit — which is precisely why the higher upstream prices climb, the weaker downstream purchasing appetite becomes.

The CPI–PPI scissors gap inflicts its heaviest damage on midstream packaging and printing enterprises.

Producing inventory out of high-priced raw materials is a losing proposition no packaging owner can bear, and more than a few have begun toying with the idea of refusing new orders.

With raw material inflation and shrinking gross margins badly squeezing their room to survive, a reshuffling of the packaging industry is bound to accelerate; yet the upstream market still shows no sign of cooling, with price-hike notices arriving one after another,

and such immense uncertainty has stripped many packaging companies of their confidence entirely.

Over the coming three months, the industry is likely to see a string of major developments.

——This article is reproduced from China Packaging Network (pack.cn); original link: http://news.pack.cn/show-377764.html