Plastic costs stretch profits

SEATTLE – Decades ago, before the invention of plastic, Italian pasta makers wrapped their hand-stuffed ravioli in paper tied with coarse string.

Jay Beattie, a gourmet pasta manufacturer in Seattle, jokes that he may have to revert to such old-style 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 increased in price since hurricanes ravaged the Gulf Coast – including plywood, wallboard and metal – few have been as sharp as the rise in plastics. Prices for the three most common resins used to make plastic have jumped 20 percent to 30 percent since August, compared with post-Katrina increases of 1.8 percent for cement, 2 percent for plywood and 6.5 percent for structural steel, according to analysts and trade publications.

The price increases 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.

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 units.

But plastic was hit by a triple whammy. The first blow came to resin factories, the majority of which are based on the Gulf Coast and were forced to shut down during the storms, creating a backlog. Second and third was the fact that plastic – unlike other raw materials – uses natural gas twice: once as the key ingredient used to make the plastic resin and a second time to generate the power needed to run the plastic factory.

Hit by all three, the Dow Chemical Co. plastics factory in Hahnville, La., on the outskirts of New Orleans, was forced to cancel more than 1,000 contracts with 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 behind 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 another 8-cent rise projected by the end of the month, according to Plastic News, an Akron, Ohio-based 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 PVC pipes used in municipal sewer and water projects.

“We haven’t seen any plastics spared,” said Mike Levy, executive director of the Polystyrene Packaging Council, an industry group.

In Montpelier, Vt., the makers of Cabot cheddar cheese, prized worldwide, have wondered: “Do we increase our prices, or do we sacrifice our margins?” said marketing director Jed Davis. The Cabot Creamery uses plastic film to cover its cheese.

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 claimed keeps ground coffee fresher.

“We don’t have enough plastic to fill the shelves,” said Tonia Elrod, spokeswoman for Folgers, a Procter &Gamble Co. brand headquartered in Cincinnati.

Both Clorox Co. and Kraft Foods Inc. have slashed their earnings-per-share expectation for the year, citing rising commodity and fuel prices. Kraft specifically cited the increased cost of packaging as one of the reasons for its revised forecast.

The food and consumer products industries have long been dependent on plastic, but during the last decade the construction sector has also seen a shift toward plastic, with PVC pipes replacing concrete pipe.

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 concrete pipe – a far more labor-intensive technique, but one that now is significantly cheaper.

For small, niche businesses such as Beattie’s high-end pasta, the increase has created an economic drama. Industry research shows that even in a gourmet grocery store, consumers shy away from pasta priced above $5 a pound, Beattie said.

However, even a 10 percent increase in the cost of plastic tubs for 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.