When it costs more, everything costs more
From packaging to pipes, prices are soaring in the wake of Hurricane Katrina. And it's forcing companies into difficult choices.
Published November 22, 2005
Decades ago before the invention of plastic, Italian pasta makers wrapped their hand-stuffed ravioli in paper tied with a coarse string.
Jay Beattie, a gourmet pasta manufacturer, jokes he may have to revert to his ancestors' choice of packaging. It would be cheaper than plastic, the material he has used for years to package his line of hand-cut fettucini, potato gnocchi and pumpkin ravioli.
Of all the raw materials that have seen price hikes since hurricanes ravaged the Gulf Coast - including plywood, drywall and metal - few have been as sharp as the rise in prices in the plastic industry. Prices for the three most common resins used to make plastic have jumped between 20 and 30 percent since August - compared to post-Katrina increases of 1.8 percent in cement, 2 percent in plywood and 6.5 percent in structural steel, according to analysts and trade publications.
The price hikes are being felt everywhere, from public works projects to grocery store shelves.
"Plastic is a huge part of our business. And we're seeing an increase in every single plastic thing," said Beattie, rattling off the different types of containers he uses to package his gourmet goods at Cucina Fresca, the Seattle pasta business he owns.
Raw materials of all kinds have been hurt by the spiraling cost of oil, which soared past $70 a barrel in the wake of the hurricane, and natural gas, which went from $10 per million British thermal units to more than $14 per million British thermal units.
But plastic suffered from a triple whammy. The first blow came to resin factories, most of which are in the Gulf Coast and were forced to shut down during the storms, creating a backlog. Second and third is the fact that plastic - unlike wood, cement and other raw materials - uses natural gas twice: Once to generate the power needed to run the plastic factory and a second time as the key ingredient used to make the plastic resin.
Hit by all three, the Dow Chemical Co. plastic factory in Hahnville, La., on the outskirts of New Orleans, was forced to cancel more than 1,000 contracts to customers ranging from Rubbermaid to Clorox, which rely on the factory for the raw polyethylene and propylene pellets used to make their plastic wares and jugs.
They were far from alone: One by one resin factories run by Exxon Mobil, Chevron Phillips, Shintech Inc. and Formosa Plastics Corp. invoked their act-of-God clauses to get out of their contracts, raising prices and delivering weeks off schedule.
The result is that three of the most common types of plastic resins have gone from between 55 and 64 cents per pound in July, to between 70 and 80 cents a pound last week - with an 8 cent rise projected by the end of November, according to Plastic News , an Akron, Ohio, trade publication. The ripple effect is being felt across the country in the cost of everything from plastic knives and forks to Styrofoam cups to polyethylene (PVC) pipes used in municipal sewer and water projects.
"We haven't seen any plastics spared," said Mike Levy, the executive director of the Polystyrene Packaging Council, an industry group.
In Montpelier, Vt., the makers of Cabot cheddar, prized by cheese enthusiasts worldwide, wonder: "Do we increase our prices? Or do we sacrifice our margins?" said marketing director Jed Davis. The Cabot Creamery uses plastic film to cover their cheddar.
In supermarkets across the country, Folgers is back to selling its coffee in metal containers, just two years after the 150-year-old company did away with its signature metal cans in favor of plastic, which it says keeps the coffee fresher.
"We don't have enough plastic to fill the shelves," said Tonia Elrod of Folgers, a Procter & Gamble Co. brand in Cincinnati.
The food and consumer products industries have long been dependent on plastic, but during the past decade the construction sector has seen a shift toward plastic - with PVC pipes replacing concrete ones. Now in cities including Riverside, Calif. and Prineville, Ore., municipal water projects are being put on hold because of a near-doubling of PVC pipe prices. In desperation, some contractors are turning back to outdated technologies, such as fashioning the pipe out of cement - a far more labor-intensive technique, but one which is significantly cheaper.
For small, niche businesses - like Beattie's high-end pasta - the increase has created an economic drama. Industry research has shown that even in a gourmet grocery store, consumers shy away from pasta products priced above the $5 ceiling, Beattie said. Even a 10 percent increase in the plastic tubs for his marinara and tomato vodka sauces will easily put Beattie above that mark, forcing him to consider a painful alternative: "If we want it to stay under $5, we need to eat the plastic cost ourselves," he said.
Many industries are considering alternative materials. Instead of gallon milk jugs made of plastic, dairy processors are substituting paper board. In the coffee business, some franchises are considering substituting waxed paper cups - which, although made of paper, contain a trace of resin - with paper cups that are resin-free.
[Last modified November 22, 2005, 02:15:27]
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