Eliot Bassett, MD at Lumon Pay, explains how ongoing global conflicts are reshaping the operational landscape for the UK packaging sector
CURRENCY volatility is one of the biggest threats to profitability in the British packaging sector, with the current geopolitical climate hitting businesses and their margins hard.
There’s no getting away from the fact that the current state of uncertainty is here to stay and the packaging sector, alongside every aspect of its supply chain, will continue to be impacted. Therefore, it’s vital that businesses recognise that financial exchange (FX) risk is now an enduring feature of the landscape they operate in.
How the sector is affected
Uncertainty stemming from geopolitical events is creating significant challenges for packaging businesses, with mounting pressures leading to far-reaching financial implications. And for those reliant on imported goods, the risk is even higher.
The cost of essential packaging materials, such as paper, corrugated board and food-grade plastics, has risen dramatically. Raw material shortages have had a big impact alongside increased energy prices. Instability is creating operational and logistical difficulties, as well as driving up costs and insurance premiums.
Even those in the sector who don’t import directly are affected, as costs are passed on from suppliers.
As many packaging materials are traded globally, the strength of the US dollar (USD), due to its connection to commodity pricing and the country’s influence on global markets, is also having a critical impact. Currencies are shifting quickly, even from one day to the next, meaning the cost of crucial materials needed for packaging can fluctuate massively.
New UK regulations – the Plastic Packaging Tax and Extended Producer Responsibility – are also having a financial impact, compounding worries and strains on businesses operating in the sector. That’s why, now more than ever, packaging businesses should ensure they are considering their currency exposure and protect themselves from FX risk.
Managing FX risk and how businesses can adapt
To better manage FX risk, packaging businesses must plan ahead. What’s most important, though, is for businesses to start treating FX risk as a permanent factor in their operational plans. It’s no longer just an occasional disruption that can be ignored. Businesses must be prepared to more effectively understand and handle the effects of currency volatility.
What is hopeful is that we are starting to a shift towards a more proactive approach to FX in small to medium-sized businesses. These companies are starting to adopt formal policies that, traditionally, would be more commonplace in larger, multi-national businesses.
Strategies which leverage currency hedging, which allows companies to secure an exchange rate for future transactions, means upcoming payments are protected from movements in the market.
This is especially important when considering how much the fluctuating USD has affected markets in recent times.
While no-one can predict the future, by planning ahead and adopting more formal practices, packaging businesses will be in a better position to protect themselves against FX risk. And by partnering with an experienced FX risk management service, business leaders can take advantage of in-house knowledge and expertise to establish their own strategies, managing the risk of currency market movements on profits and margins – no matter their size.
Geopolitical tensions, and resulting currency volatility, aren’t going anywhere soon; it’s always going to be a huge factor for the packaging sector. But, with the right FX frameworks, and by ensuring FX is an integral part of operations, businesses can hold firm, build resilience and, ultimately, experience economic stability and growth.
