Somebody has to foot the bill for the rise in commodity prices in the past 12 months. By now, you might, for example, expect the 20 per cent increase in aluminium prices to squeeze margins at Rexam, the world’s largest beverage can maker. Indeed, such fears are partly to blame for its share weakness in recent months. This makes its strong operating performance in the first half all the more reassuring.

Rexam is largely protected from the aluminium price rises, for now. Part of this is due to the vagaries of US can-making, which accounts for about half of Rexam’s aluminium exposure. North American beverage bottlers generally buy the aluminium themselves, paying packaging groups to convert them into cans. For the rest, Rexam is extensively hedged, covering all its needs for this year and around 80 per cent in 2005. Simultaneously, it has been able to increase prices as promised.

This suggests Rexam’s customers will bear much of the brunt. The company has traditionally been able to pass on rising raw material prices to European customers, where the market is fairly concentrated. But on a global basis, Rexam only has a 23 per cent market share. Cost pressures could make their impact felt on the operations it bought in other regions, when its hedges run out, and the longer term outlook for aluminium prices remains murky.

Rexam’s experience underlines that investors need to pay careful attention to regional market dynamics when assessing the impact of raw material prices. For Rexam, environmental concerns may well prove a larger risk in the medium-term. There are no signs of a reversal in Germany’s packaging laws, which have collapsed can usage. Other European countries may yet follow suit. As a result, Rexam’s absolute valuation remains fairly ambitious, despite the progress it made in recent years.

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