Rexam expects to further raise the price of its beverage cans in the coming year, the packaging giant said yesterday in its second quarter financial report.
The price hikes, which will hurt margins for beverage manufacturers, are being made in response to the record rise in cost for aluminium. Throughout, Rexam has managed to leverage its size and market share to perform a magic trick -- increase prices while increasing sales.
With the company purchasing the sizeable plastic packaging operations of O-I, other food and beverage manufacturers can expect that size to weigh down on them when it comes time for price increases.
Rexam, the world's largest can manufacturer, said overall sales from all ongoing packaging operations were up 5 per cent, while organic sales grew 10 per cent in the six months to the end of 30 June.
The underlying operating profit from ongoing operations were impacted by high aluminium costs, a strike in the US and a weak US dollar.
Rexam also noted that it managed to pass on "substantial" price increases on open beverage can contracts in Europe.
Throughout the hikes beverage can demand in Europe and South America remained strong, but were offset by weaker North American volumes, Rexam reported.
More hikes are coming, the beverage maker warned, noting that the price of aluminium remained at an average of US$2,770 per tonne for the first six months of the year.
For the remainder of 2007, Rexam is on contract to buy 70,000 tonnes and forecasts a price of between US$2,600 and US$2,700 per tonne.
"However, we expect the aluminium exposure risk to reduce over time," the company stated.
Rexam's cost base is largely unaffected by the changes in the price of aluminium in the Americas as major customers there agree the cost in advance, effectively resulting in a cost pass through.
In Europe, Rexam is negotiating with increasing numbers of large customers to opt for the pass through model such that some 50 per cent of the contracts will be made on this basis in 2008.
In addition, Rexam said that by year end it will renegotiate a further third of open European beverage can sales contracts for 2008 supply to achieve further price rises.
During the first half of 2007, Rexam sold 3 per cent more by volume of beverage cans compared to the same period last year.
"Capacity utilisation remains high at all our beverage can plants and we succeeded in gaining substantial price increases in 2007 on the open one third of sales contracts which were renegotiated in Europe," Rexam noted.
Despite the increased volume and better pricing, the company's margins across beverage vcans were down on the equivalent period last year mainly owing to continuing high aluminium prices and the costs associated with the strike in the US.
"We remain confident that margins will improve in the second half and
further still in 2008 as we see continued volume growth and improved pricing," Rexam stated.
In the plastic packaging division sales rose 3 per cent on the equivalent period last year. Margins rose slightly to 11.1 per cent, the company reported.
In the food packaging sector, Rexam reported the US business grew. Outside the US the company is following a strategy of developing its high barrier food packaging sales outside the US.
Rexam is exiting the manufacture of lower margin food container products in the UK and starting production of high barrier containers.
"This process is in its early stages and, as a result, overall sales declined in the Food division year on year, but we are confident that this strategic shift will deliver good returns over the medium term," the company reported.
The company is also in the process or restructuring, which it announced last November. The restructuring included a staff cut of 1,000 and plant rationalisations in China and Europe.
The company's strategy to capture growth in plastic packaging was reflected in the acquisition of O-I Plastics for US$1,825m, announced in June and expected to complete today.
O-I Plastics is a leading US manufacturer of rigid plastic healthcare packaging and plastic closure systems.
"It transforms our plastic packaging business, creating meaningful scale and leading positions in two important rigid plastic packaging growth segments: -- healthcare packaging and closures," Rexam stated.
The company will organise its plastic packaging division by combining the six divisions into three larger units -- healthcare, closures and personal care.
"This structure will provide further opportunities to streamline the business and leverage our international scale," the company stated.
In Europe, beverage can volume growth rose 14 per cent on the same period last year as a result of high demand in a number of European countries and the continued growth of the energy drinks market.
In the energy drinks market the packages of choice are the 25cl can and, increasingly,
the Rexam Sleek branded can, the company stated.
As a result, Rexam is investing more into a can making plant in Austria with an additional line, making three in total. The plant is expected to be fully operational by late 2008.
In Spain the company is installing a further steel line to meet market growth there, and in Egypt it is adding a second steel line to the plant acquired in 2006.
The lines in Spain and Egypt are expected to become operational in the second quarter of 2008.
In North America, volumes declined 10 per cent overall compared with the equivalent period last year owing to a drop in carbonated soft drinks volumes, the strike at nine of the company's plants and reduced production as the company continues to convert 12oz lines to higher growth specialty size capacity.
Specialty can volumes now account for about 14 per cent of volumes in the US and grew about 29 per cent compared to the same period last year.
In addition to the line conversions, the company has added a line for specialty sizes. In South America, beverage can volumes increased 16 per cent compared with the equivalent period last year, fuelled by continued strong growth in Argentina and Chile and continued growth in specialty cans in Brazil.
In Central America, the company announced the formation of a 50-50 joint venture with Envases Universales in relation to a plant in Guatemala, which will have a capacity of one billion cans.
The company already has a beverage can making plant in Queretaro, Mexico, where the market our presence in a market growing at a rate of about 6 per cent per annum.
In July, we announced that we had reached agreement to acquire Rostar, the main beverage can maker in Russia, for US$297m.