Many processors have responded to recent price hikes by managing their packing inventories more efficiently and by downguaging to lower priced products, says a Standard & Poor's report releasedthis week.

Those using rigid plastic containers, metal and glass for their food and drink products will be most affected by increasing in packaging prices in the short term, S&P says.

Ongoing raw-material price pressures, mainly due to significant hikes for plastic resin, and limited year-over-year volume growth are the key issues facing the packaging industry, stated S&P credit analyst Liley Mehta.

"End customers are also managing their inventory balances in anticipation of raw-material price movements, and smaller order patterns have affected volume growth for plastic packagingsuppliers," she stated.

The prices of certain plastic resins, including polypropylene and polyethylene, have declined in recent months. However the trend has been offset by increased oil and natural gas prices and effortsby the petrochemical companies to push through further hikes. This could lead to further increases in plastic resin prices during the remainder of the year.

Several of the packaging companies remain focused on restructuring actions, increased productivity and cost savings to offset the increased raw-material costs.

The increases could potentially add more pressure to flexible plastic packaging companies. In contrast, companies producing rigid plastic containers are less vulnerable because they generallyoperate under contractual arrangements with most customers.

This allows for pass through of raw-material price fluctuations to customers, though with a few months' time lag, S&P stated.

The US glass packaging sector is also being hit by higher natural gas prices and increased soda ash prices. Glass producers are expected to gradually recoup higher energy costs through the priceadjustment formulas contained in many of their supply agreements with customers, S&P stated.

Many food companies have been converting from glass to plastic packaging, the analyst stated. Weak beer demand, which has been a key growth driver for

glass containers in the past, and added capacity later in the year are factors that are adversely affecting the demand-supply balance in the US. glass packaging industry.

Volume trends in glass packaging were favourable for packers in Europe supported by growth in wine, champagne, and beer.

In the metal can segment packagers have been able to pass on steep increases in steel prices to their food and aerosol can customers. This is due to the mostly contractual nature of therelationships with their customers.

US metal can volumes have also declined in the second quarter over the prior year. In Europe demand for beverage cans has grown supported by a warm summer and good volumes in the higher growth EastEuropean markets, S&P stated.

In Europe S&P stated that Ardagh Glass main market in the UK remains under threat from the additional capacity in a highly competitive market. High natural gas prices continue to put pressureon the company's margins, as the group has very little hedging in place.

Owens-Illinois, a major player in both the US and Europe, now plans to reduce debt by about $150m to $200m in 2005, compared to previous estimate of $300m. The company is making a bigger cutprimarily because of higher cash restructuring costs related to the ongoing integration of the BSN acquisition, S&P stated.