Feb 3, 2009

Business - The Hidden Commodity in Canned Food

Greg T. Spielberg

Commodities and speculation have traveled together since cave dwellers first traded flint rock. Crude oil suffered a stunning collapse in 2008, losing more than $100 per barrel in five months, while gold prices nearly doubled between 2007 and 2008. But there's another commodity that commands a prominent place in nearly every home, without nearly the same attention: tin-plated steel. Used in food, aerosol, and paint cans, tinplate is a strip of light-gauge steel coated on both sides with tin. It gives cans their slick texture and, more importantly, their noncorrosive properties.
While tin isn't as celebrated as gold, it's proven to be just as important. Kitchen pantries and supermarket shelves are filled with food packaged in tinplate cans -- everything from tomato sauce and chick peas to sardines and salmon -- and dozens of other foods. The rise of the supermarket itself was fed by the tinplate can, along with glass and paperboard containers. Before this, grocers had to serve each customer individually, divvying up portions a la carte. "Before 1900, you went to the store and the guy behind the counter packaged everything up for you," says Diana Twede, a professor at Michigan State University's School of Packaging. It's easy to see how tinplate has saved Americans time and money, but tracing its costs can be tricky.
The Pricing Gap
Tinplate itself is not a commodity, but its price is tied closely to base steel, which like oil and gold, is set continuously by the market. In 2008, the composite North American steel price for hot-rolled coils (the type used for tinplate) traced a bell-curve, rising from $734 per ton to $1,223 in July and falling back to $771 in December. Meanwhile, buyers, who typically have contracted prices a year in advance, paid a constant price for tinplate.
The exact price for tinplate and individual steel products is hidden unless you're looking to buy. While commodities like zinc, copper, oil, and gold are relatively pure, steel products are diversified and use-specific. They don't come in lump sums, so price depends on element and design characteristics. "You can't take bar steel and use the steel for Campbell's Soup," says Mark Parr, a steel industry analyst with Cleveland's KeyBanc Capital Markets. Steel companies simply report total tonnage produced and aggregate prices. Even the number of cans produced is veiled. For reporting purposes, the Federal Trade Commission allows makers of steel and aluminum cans to combine their output figures of those products to protect trade secrets, given the dearth of players. Through the first three quarters of 2008 there were 22 billion food-can shipments, slightly below the 2007 pace, according to the Can Manufacturers Institute, the industry's Washington-based trade group.
For tinplate production, a tiny part of the steel industry, producers and canners traditionally set yearlong contracts. This insulates the average consumer from volatility in food prices, but can sometimes shortchange the steelmaker. In September, Luxembourg's ArcelorMittal (NYSE:MT - News) announced it would likely raise tinplate rates by 50% in 2009. Although prices are up 40% to 50%, the end consumer isn't likely to notice much difference. Cans represent between 20% and 40% of the final product price with the higher side represented by thick paint cans. "This isn't unexpected," says Chris Manuel, a packaging analyst with KeyBanc Capital Markets. He estimates that a food can costs about 8%, which translates to a 1% or 2% price increase on the shelves.
Tinplate Products, which sells containers for various household items as well as for themed products such as tins shaped like Jaguar or McLaren cars, negotiates its tin supply annually. The London firm is trying to pass along higher tin costs to customers with varying success, says Sam Aburrow, an employee. Price increases are capped by the availability of aluminum, says Manuel, even though the field has only a few tinplate makers such as U.S. Steel (NYSE:X - News), ArcelorMittal, and Russia's Severstal (CHMF.RTS). They supply U.S. container makers such as Crown Holdings (NYSE:CCK - News), Ball (NYSE:BLL - News), and Silgan Holdings (NasdaqGS:SLGN - News), the three largest players in the tinplate field. "If you raise prices too much, you can have substitution or conversions," Manuel says, pointing to the broad shift from steel to aluminum in drink cans.

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