Is the energy crisis really over?
Image: distelAPPArath/ pixabay
It seems as though the worst forecasts expressed at the end of 2022 concerning the European energy crisis were not destined to come to fruition. Still, the state of play is far from perfect. Vladislav Vorotnikov reports
Soaring energy and input prices were among the key factors driving metal packaging production down in 2022. Now, the storm seems to have passed, although optimism in the industry remains cautious.
The metal packaging industry’s production value in Europe contracted by 1.9% in 2022, as the industry faced a number of challenges, including rising costs of energy and input materials, commented Justinas Liuima, industrial research manager at Euromonitor International.
However, at country level, the situation differed. For example, the production volume index of metal packaging in France and Spain improved in 2022, as these countries were less severely affected by the energy crisis. On the contrary, the production volume index of metal packaging in Germany, the UK and Italy fell by 6.6%, 7.5% and 12.8%, respectively, as these countries were highly affected by the rising energy costs, Liuima said, adding that for example, the metal packaging industry’s spending on gas in the UK increased by 9% in 2022, while the metal packaging industry’s spending on gas in Germany soared by 120% in 2022.
Still, the UK energy industry suffered from a stronger spike in energy prices compared with some European countries, commented Robert Fell, director of the UK Metal Packaging Manufacturers Association.
“Energy prices put a severe strain on our metal packaging manufacturers, especially given the significant differential between UK energy prices and those ‘enjoyed’ by our European neighbours and competitors,” Fell said, pointing out the fact that some companies were unfortunate to renew their long-term energy contracts in the period of the peak prices.
For these companies, the energy crisis will continue for as long as their current contract unless the government intervenes, Fell admitted. In addition, for the UK metal packaging industry, the gap with energy prices in continental Europe remains a particular issue.
“That said, energy costs will remain an issue for UK can makers for as long as the differential in energy costs between the UK and Europe remains,” Fell said.
The same phenomenon is seen in continental Europe. For example, in the Baltic states, local companies also complained that the energy suppliers want to switch to shorter-term contracts to be protected from losses, in case of new price turbulence in the market.
Seeking a remedy
Liuima, however, stressed that despite the challenges, the European metal packaging industry managed to maintain relatively stable profit margins in 2022, as manufacturers benefited from sustainability trends favouring non-plastic packaging, and managed to pass on cost increases to the buyer industries.
For example, the producer price index, which indicates the level of manufacturers’ selling prices, grew by 14-18% in the largest Western European countries of Germany, France, Italy, Spain and the UK. This indicates that metal packaging producers managed to sell their goods at much higher prices and compensate for cost increases.
“Better production planning also helped the industry to maintain relatively stable profitability and adapt to the rising costs environment. For example, in the fourth quarter of 2022, the production of light metal packaging in Europe declined at a faster rate than the demand. This helped manufacturers to reduce stocks of finished products, avoid higher increase in energy costs and prepare for the anticipated demand recovery in the first half of 2023,” Liuima said.
This is largely in line with the official position of the European authorities. The European economy has managed to weather the energy crisis thanks to a rapid diversification of supply and a sizeable fall in gas consumption, the European Commission has recently said.
Markedly lower energy prices are working their way through the economy, reducing firms’ production costs. Consumers are also seeing their energy bills fall, although private consumption is set to remain subdued as wage growth lags inflation. To face the rising energy prices, European business last year largely looked into green opportunities. The metal packaging industry was no exception.
“On-site green energy generation would certainly help [to mitigate rising energy costs]. However, there is a problem with regard to the investment required,” Fell said.
“All our large can makers are part of the UK’s Climate Change Levy scheme (CCL), which requires them to increase their energy efficiency in return for significant discounts on the CCL costs. Currently, on-site green energy generation does not count towards CCL, as it’s an energy conversion rather than an energy reduction. Thus, if the UK can makers wish to install green energy systems, they must make two investments: into the green energy system and into whatever investment they require in order to fulfil their CCL obligations,” Fell added. The UK Metal Packaging Manufacturers Association has proposed to the UK government that they change the target of the CCL scheme from energy efficiency to hydrocarbon energy efficiency, so that a single investment in, say, solar panels, would meet both targets. There would be no cost to the government, but it would certainly stimulate green energy investment.
Inflation bites
While energy prices have largely subsided across Europe during the past several months, the governments keep struggling against rampant inflation. In some countries, authorities speak about a full-fledged cost-of-living crisis, which forces consumers to revise their budgets.
The cost-of-living crisis in Europe will make it more difficult for metal packaging producers to pass on cost increases to end consumers in 2023, Liuima warned.
For example, 35% of consumers globally in Euromonitor’s Lifestyles Survey 2023 indicated they plan to increase spending in discount stores in 2023, while 44% of consumers plan to save more money in 2023. These trends show that consumers are pressured by rising prices and are planning to make changes in purchasing patterns.
As a result, metal packagers will also have to focus more on cost discipline in 2023, Liuima said, adding, however, that the overall demand for metal packaging products is expected to remain stable in 2023, despite the ongoing cost-of-living crisis.
“A large share of metal packaging is used in the food industry, which is less sensitive to the changes in economic cycles or price changes. Sustainability trends will also continue to support demand for metal packaging, which is easier to recycle. For example, 52% of consumers globally in Euromonitor’s Lifestyles Survey 2023 stated they prefer recyclable packages when making a purchase,” Liuima said.
Fell shares the same opinion. He explained that, in general, metal food cans always tend to do well in a crisis, as consumers see them as a safe and secure choice for their food. He admitted, though, that beyond food, it’s likely all sectors are adversely affected to some extent.
High uncertainty
Still, high uncertainty in the energy markets remains among the key risks for the metal packaging industry in 2023, Liuima warned.
“Even though energy prices have stabilised as the global economy cools, factors such as OPEC supply cuts, a colder winter in Europe in 2023, or spillovers from the war in Ukraine, could add to the higher volatility in the energy markets,” she stated.
The downward price rally on the energy market happened largely because Europe has amassed higher-than-usual inventories due to a relatively mild winter, record imports of LNG, and tepid demand. Still, market players are wary of the persistent risks, including the possibility of even lower Russian supplies and competition with Asia for LNG.
The average price of the European gas features jumped by nearly 20% between March and June, and under a certain scenario, the energy crisis could return.
“Economic growth in China is another factor for the industry to watch in 2023. So far, economic recovery in China remains fragile. However, faster consumption and economic growth towards the end of the year could increase global demand for metals and commodities, in turn leading to higher input costs for the metal packaging industry,” Liuima said.
This feature article is restricted to logged-in paid subscribers.
Login or subscribe now to view this exclusive content.
