Increases in the price of raw materials and inputs is a perpetual fact of life in many industries across the board and AFGRI Poultry has not been able to escape this either. Packaging increases are one thing, but a business has to be mindful of the impact on the product when this price is passed onto the consumer. In the case of AFGRI Poultry this was not an option.
23 October 2014 – Johannesburg – Over the past year or so, the flexible packaging industry has been hard hit by sustained increases in the price of polymers, which in turn adversely affected the price of polymer and packaging alike.
Polymer is sold in South Africa at Import Parity, which means that it is sold at the same price as the import alternative. Despite the base polymers such as LDPE and LLDPE being manufactured locally by Sasol.
With polymer being sold at Import Parity, the prices are very much influenced by the Rand / Dollar Exchange rate, oil price and of course the international polymer prices too. The Rand has been steadily declining in value against the dollar and has lost around 36% of its value over the past two years.
These two primary influencers then directly influence the price of polymer sold locally and all producers and re-sellers follow these trend prudently to ensure levels are maintained close to these indicators.
Approximately 75% of the delivered price of flexible packaging is directly linked to polymer raw materials. As a result, local pricing from packaging producers had to follow the trend. The impact has been felt in extremely high packaging cost due to raw materials having reached record levels.
Supply and demand dynamics are caused to ebb and flow as international polymer prices are strongly influenced by the oil price. Alternative application of gas for heating fuel in the northern hemisphere usually reduces the supply of polymer conversion, resulting in an annual increase in the price. World economic pressure since 2008 has put continual pressure on the dynamics of polymer prices, resulting in the extremely high prices of this vital raw material.
The knock-on effect of polymer prices supplied to South African, as surprising as it may seem, shows a 63% increase over the past two years through the culmination of rate of exchange, oil price and supply and demand dynamics.
The impact on AFGRI Poultry
AFGRI Poultry has to devise a savings strategy as a solution to these raw material price increases, without passing any additional pricing onto an already cash-strapped consumer. The solution had to maintain all integrity and standard required of packing for this vital protein source.
Together with suppliers, innovative and creative thinking was implemented to come up with a solution to packaging sustainability even with this exponential increase in raw material prices. The solution is a process called down gauging.
Down gauging is a procedure where product material film is strengthened and the thickness of the film is altered (reduced). This process ensures two primary benefits; firstly cost saving and secondly better production efficiency for the supplier as more film metrics per hour can be blown. Greater yields in packaging usage has been immediately realised with:
- less meters used to cover a greater square area of palletized stock for the same price,
- modification from a 35 micron non slip film to a 25 micron none slip film again provides better yield and
- printed and unprinted bags were modified by means of down gauging and size efficiencies
to existing product specifications, bring about sustainable packaging prices
In conclusion Chris Venter, CEO of AFGRI, said that, “For the past 36 months the poultry market has been an extremely difficult environment. The additional pressure from packaging is not always welcome, but trends to come with the territory. Times like this call for innovative thinking. We are extremely pleased with the result.”
It is expected that polymer prices may show reduction in 2015, however not to levels as low as experience in 2008. As international and local economic uncertainties prevail, price pressure and increases are expected to be the new-normal.
Issued for: AFGRI Limited
Contact: Chris Venter, Chief Executive Officer (CEO)
Account: Keyter Rech Investor Solutions
Contact: Vanessa Rech Lynne van der Schyff
Tel: 087-351-3814 or 083-307-5600 087-351-3815 or 082-920-4395
Date: October 2014