Brexit And Climate Change: – Counting The Costs!

Posted on 22 Aug 2017

Brexit and Climate Change: – Counting The Costs!

It is interesting that the two most talked about events in recent years, Brexit and Climate Change, should come together to have a major impact on the Food Industry and the supply of Flexible Packaging.  This juxtaposition is even more bizarre when you consider how far apart these two industries appear to be on the surface.

However, there is little doubt that the origins of the current major problems in both markets can be traced back to the two seemingly unrelated events of Brexit and Climate Change.

The Food Industry
Let’s first consider the Food Industry, and in particular the magnitude of the increasing cost pressures being faced by every market segment from bakery to meat products, from confectionery to produce.  What we see is input prices for ingredients, meat, fish, fruit etc are all increasing well above the rate of inflation. Some figures suggest the price of butter is 100% up year on year with sugar 40%, milk 18%, meat and fish 17%, fruit and veg 12/14%.  All these cumulative cost increases have left the finances of some food companies in a truly parlous state.

Whilst the effect of Brexit on sterling is well documented, with a decline in value against both the Euro and the Dollar, these reductions only explain part of the cost increases noted above. Those in sugar, wheat, animal products, feed and milk are in a major part due to climate change across the globe.  Whilst some regions have been too hot, others have suffered from unseasonable wet and cold spells (including the UK). The result has been a totally disproportionate increase in input costs for each and every food manufacturer and processor.

Flexible Packaging Industry

Whilst the above scenario may be interesting, what is its significance to the Flexible Packaging Industry?  Obviously there is a symbiotic relationship between flexible packaging and the food industry.  Indeed it is no exaggeration to suggest that much of the food industry would not exist without the advances made in film technology and so called “plastic packaging”.

However, apart from polyethylene it’s fair to say the manufacturing base for flexible film in the UK is virtually non-existent (sorry Innovia).  As a consequence all the film used has to be imported either pre or post conversion.  Therefore the decline in sterling has over the past 12 months increased all the flexible industries raw material costs by 12/14%.  This increase is well beyond the financial resources of the industry to absorb. In the past it would have gone directly along the supply chain to the ultimate consumer, but that’s where Brexit comes in.

The supermarkets and the major food retailers have, in their wisdom, decided they can’t/won’t accept price increases. As a consequence the food manufacturers and processors are (perhaps understandably) adopting a similar approach.  So what happened next?

In the last 3 months, Pulse, once the second largest film and print converter in the UK closed. Amcor the largest film and print converter in the UK announced 120 people redundant in their Cumbria factory (later reduced).  RPC the latest UK entrant into flexibles, declared redundancies at its Worcester factory, whilst Coveris are in the process of taking similar steps to reduce their business costs at their Burnley site.

Perversely, in the midst of all this downsizing the Pulse closure has created a degree of supply chaos as ex Pulse customers have transferred their business to other converters and as Pulse had sales of circa £65 Million, that’s an awful lot of business looking for a home.  The consequence is that lead times for deliveries from some printers are in months not 2/3 weeks (excluding National Flexible) and some of the redundancy plans have been shelved.

It is inevitable that those companies who have taken on the Pulse work will increase prices so we should see prices rises for film in the final quarter.  There is simply not enough profit in the supply chain to absorb extra costs incurring from Brexit and Climate Change.

Mergers and Acquisitions

Finally it’s equally interesting to see major International paper companies “voting with their wallets” to enter the flexibles market- Mondi via Excelsior, Saica via Americk, Coveris and Sappi via Rockwell. This trend allied to RPC acquisition of BPI group earlier this year confirms that despite the current turmoil, the future for flexible film in the UK remains bright.  The replacement of glass, tin, and board packaging with flexibles ensures continued volume growth.  These predominantly paper companies obviously believe that eventually the increased cost of flexible film can be accommodated, as in every case it is a lower cost than the alternatives.  It also reduces waste and has lower adverse environmental impact.

We believe there are more mergers and acquisitions to come as the Flexible Industry continues to consolidate.

If you have any thoughts on any of the items raised they will be welcome.

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