The cost of aluminum is rising quickly
After more than doubling from pre-pandemic levels, aluminum prices on the London Metal Exchange reached over $3,400 per ton in November of 2022. The limited supply resulting from sanctions on Russia, the main supplier, and production cuts related to the epidemic drove the increases for the base metal. Global demand is still high and stocks are still low as economies reopen.
Due to persistent geopolitical threats, China's zero-COVID policy preventing a full recovery in output, and a lack of enough new production capacity in the near future, most analysts predict that aluminum prices will stay above $3,000/ton until at least mid-2023. The primary input used to produce aluminum foil is aluminum ingots, which make about 30–40% of the entire cost.
Energy cost inflation adds to headwinds
Natural gas and electricity prices in Europe and North America have also more than doubled compared with the same period last year, adding to overall inflationary pressures on aluminum foil production. Depending on the region, electricity costs account for 20-30% of manufacturing costs.
Gas production at some European foil plants will increase by more than 500% above 2021 levels as a result of the weaponization of Russian exports. Even taking into account government mitigation plans, manufacturers still face a cost burden of 20-30% through volume contracts.
With both aluminum and energy expected to surpass every previous inflation peak, bulk buyers will be prepared to pay a combined surcharge of at least 15-25%, depending on regional and industry dynamics. Some experts warn that it could take 30-40% if commodity prices break out to new highs relative to already elevated levels.
Suppliers defend profitability
Aluminum foil producers say higher prices are necessary to maintain profit margins and combat unprecedented inflation. Novelis reports that aluminum costs will increase 35% in 2022 from the previous year to $3 billion annually. Even with a 10% price increase, input costs would still climb $300 million, eroding profits.
To sustain investment in capacity expansion and offset permanent base cost increases, most suppliers believe surcharges must be embedded in escalators well above current inflation levels. The new contract is designed to protect against potential further price surges amid continued global uncertainty.
Jeff Dascoli, chief financial officer of flexible packaging giant American Packaging, said on a recent earnings call: "Aluminum prices have increased by more than 70% since 2020 and energy prices have increased by double digits - there is no turning back, so prices must go higher. ” Flexible long-term contracts indexed to key inputs appear to be the most likely solution.
As major customers, large commercial buyers have some bargaining power and can mitigate the impact through the following strategies:
Extend volume commitments beyond 3 to 5 years in exchange for stable pricing
Indexing on a quarterly basis rather than a one-time surcharge for a more progressive principle
Responding to unforeseen inflation spikes beyond agreed levels
Link price increases to independently verifiable cost benchmarks
Explore hedging programs to lock in the cost of major inputs
While these strategies are limited in fully offsetting supplier demand, they can smooth price transitions. Working together to develop enabling contractual frameworks is critical to balancing interests at a time when the entire value chain faces long-term inflationary challenges.
Pricing outlook remains highly uncertain
The pandemic has rewritten the standard playbook, leaving both bulk buyers and producers dealing with unprecedented volatility with limited visibility. Geopolitical or macroeconomic surprises could significantly alter the trajectory of commodities and energy in either direction.
While directional price increases appear necessary and reasonable given the surge in inputs, the exact magnitude is anyone's guess and depends on macro forces. Annualized inflation expectations assume a return to a stable (but higher-cost) cost regime, but supply shortfalls and consolidation of inflation could also bring further surprises.
Given the ongoing uncertainty, a flexible aluminium foil framework appears to be a sensible solution. With all priorities now turning to resilience, the foil industry’s ability to work together through partnerships between suppliers and customers to manage the impact of inflation in the short and long term will prove to be key. Meeting challenges in a spirit of shared sacrifice and problem-solving bodes well for the stability of disrupted value chains.
Soaring costs for aluminum, natural gas and electricity have foil converters and commercial bulk customers bracing for significant price increases in the near future. Food, consumer goods and industrial users face surcharges of 15-30% in response to input price spikes exceeding any previous inflation cycle.
While passing costs on to consumers may carry the risk of demand destruction, maintaining profitability amid record input inflation is also non-negotiable for suppliers. Collaborative solutions are needed to balance interests and respond to an unpredictable economic environment that could lead to continued volatility in commodities. Flexible contractual frameworks appear to be critical to navigating the high-risk new normal, with implications permeating all levels of the value chain. A negotiated solution that emphasizes risk-sharing offers the best hope for dealing with an inflationary challenge of unprecedented scale and uncertainty.
