Tackling the energy crunch
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Vladislav Vorotnikov studies the impact of the skyrocketing energy prices on the metal packaging industry in Europe
Biting energy prices in Europe have become one of the key consequences of the Russian invasion of Ukraine and the main challenge metal packaging companies must face in 2022. Although the energy costs retreated from the peak levels achieved in the past several months, they remain alarmingly high.
Justinas Liuima, industrial research manager at Euromonitor International, commented that the energy crisis in Europe impacted the European packaging industry both directly and through higher input costs. “Because of higher energy and electricity prices, packaging manufacturers in Europe have to spend more on operating expenses, and this directly impacts the profit margins of companies,” he said, adding that higher energy prices also put pressure on the packaging industry due to the higher costs of input materials, with metal packaging and plastics industries affected the most.
“For example, average prices of aluminium foils and films used for packaging shot up by 50 to 60 per cent in the first quarter of 2022. This further adds to the cost pressure for the packaging companies,” Liuima added.
Rising prices of energy and input materials naturally resulted in higher prices of packaging products across Europe, Euromonitor International estimated. For example, the producer price index of plastic packaging goods in Europe increased from 112.9 in January 2022 to 126.2 in October 2022, which is the latest available data at the time of writing. The producer price index of metal containers increased from 131.3 in January 2022 to 146.7 in October 2022.
Kale Symons, communication manager at Metal Packaging Europe, admitted that the industry has no consistent data on the impact of inflation and soaring energy bills on the European canneries. Still, he added, the adverse effects of the crisis are seen with the naked eye.
“As energy prices rise, so do the costs associated with aluminium and steel production.
Since 2008, the EU has lost 30 per cent of its primary aluminium production capacity, despite a steadily growing demand for aluminium in Europe and globally. As the situation in Eastern Europe continues, supply chains are further disrupted by rising fuel prices,” Symons said, adding that due to a lack of certainty, it is hard to make predictions pertaining to the future of the European metal packaging industry.
Soaring costs
The metal packaging industry is directly affected by the rising costs of electricity and energy resources. For example, on average metal packaging industry spends around 3.5% of its total operating costs on electricity and 1.2% on purchasing energy products, mainly oil and gas, Euromonitor International estimated.
“Thus, a sharp rise in energy prices in Europe in 2022 directly impacted the packaging industry through higher operating costs, as it had to pay more for electricity and energy products. For example, natural gas price in Europe in the first quarter of 2022 was five times higher than in the first quarter of 2021. In the third quarter of 2022, natural gas price in Europe was three times higher than in the third quarter of 2021,” Liuima said.
At the beginning of the crisis, concerns have been voiced not only about the skyrocketing costs, but also about the very availability of natural gas.
Since the beginning of the Ukraine war, the Russian state gas monopoly Gazprom stopped natural gas exports to Bulgaria, Finland, Poland, Denmark and the Netherlands over non-payment in roubles. For some countries, especially those traditionally relying on Russian supplies, a threat of stopping all production dependent on natural gas seemed real.
The dependence on Russian gas varies across Europe. In 2021, Bosnia and Herzegovina, Moldova and North Macedonia sourced 100% of their natural gas supplies from Russia,Eurostat estimated. Almost all countries in Eastern Europe traditionally relied on Russian imports, as in 2021, Latvia sourced 92% of its natural gas supplies in Russia, Serbia -89%, Bulgaria – 79%, Slovakia 68%, Hungary – 61%, Slovenia – 60%, and Poland 50%.
The difference is drastic if compared to Western Europe, where fears over the availability of natural gas are also being voiced. In this part of the region, Germany has the highest dependence on Russian natural gas imports at around 50%, followed by Italy with 38%, France with 15% and Belgium with 14%, Eurostat reported.
However, the fears over the availability of natural gas subsided in recent months as European countries managed to expand LNG imports and switch to alternative suppliers.
The raw material base is jeopardised
The metal packaging industry is also facing a potential shortage of input materials in the future. High energy prices also impact energy-intensive sectors, such as aluminium production, chemicals or fertilisers. Because of high energy prices, the primary output of aluminium in the EU was reduced by one million tonnes or 50% in 2022.
“Estimates suggest it could cost €400 million to restart one aluminium smelter, and it will also take time until new production will reach the market. Thus, the reduced production output of aluminium is likely to remain among the key risks for the European metal packaging industry in 2023 and will further add to the supply pressures,” Liuima added.
Europe’s aluminium industry, for example, has warned that it will need government support to survive the winter period. Electricity prices account for around 40% of production costs in aluminium production in Europe, with the price of inputs leaping 400% since last year. It is hoped that the newly agreed cap on the price of oil will bring some relief to the industry.
Hopeful prospects?
On the other hand, energy costs impact not only metal packaging producers but also consumers, who must revise their budgets. However, Metal Packaging Europe estimated that the current crisis does not negatively impact the demand for metal cans on the European market.
“Consumers are adjusting their behaviour, purchasing canned vegetables to avoid food waste or enjoying a can of beer at home instead of heading to the pub,” Symons said.
Moreover, in some segments, the demand is even expected to rise as a growing number of customers opt for canned food, as shown in recent opinion polls.
In a recent Eviosys survey of 2,000 citizens in the UK, France, Germany, and Spain, 40% confirmed that they would buy more canned food to help weather the cost-of-living crisis. Another recent survey carried out by IPSOS on behalf of Metal Packaging Europe demonstrated that long shelf-life and ease of storage were the two main reasons that consumers chose to buy canned food, according to Symons.
Moody’s Investors Service estimated that demand for beverage cans is currently outstripping supply, which could allow the segment to continue putting up prices without too much pushback.
Stabilisation is close, but problems remain
Manufacturer prices in Europe are expected to stabilise in 2023 as inflation and energy prices show signs of peaking, Liuima said, adding that as the crisis shows no signs of letting up, the prospects for 2023 look vague.
“Uncertainty over energy supplies for the 2023 season and potential shortage of input materials remain among the risk factors for the European packaging industry,” Liuima said.
“In addition, high energy prices will continue to impact the global competitiveness of the European packaging industry. For example, natural gas prices in the US remain around five times lower than in Europe, making imported products more attractive in the European market and affecting the competitiveness of the European exporters.”
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