Skyrocketing costs for oil and natural gas, increasing labor expenses, continued supply chain disruption and geopolitical uncertainty are among the key factors that could further inflate prices on promotional products in 2022, according to promo industry executives.

Such pressures “certainly add to the inflation that’s already in the market,” says Jonathan Isaacson, CEO/chairman of Lawrence, MA-based Top 40 supplier Gemline (asi/56070) and a member of Counselor’s Power 50 list of promo’s most influential people.

Promo suppliers increased prices in 2021 as their production, labor and transportation/freight costs soared. Some implemented additional increases in early 2022, often (but not limited to) a range of 2% to 10%.

A number of industry executives assert that it’s too soon to say the extent to which the latest inflationary spike might propel more product price increases, but there’s a growing current of belief that more hikes may be coming.

Some executives think that, for instance, there will be additional industry increases within a range of 5% to 8%, depending on the product. While contingent on how long and severe inflationary pressures persist, some promotional products price increases could be even greater.

“We will continue to experience inflation this year,” says Jing Rong, vice president of global supply chain and compliance at Braintree, MA-based Top 40 supplier HPG (asi/61966). “All of us should prepare for further inflation on all products we buy.”

The Role of Fossil Fuels

Globally, oil and natural gas prices are surging. Early the week of March 6, the price of oil hit a 13-year high and crude was up 60% from Dec. 8. Meanwhile, the cost of natural gas in Europe raced to record highs.

While rising demand is one important factor, the primary accelerator of prices currently is Russia’s invasion of Ukraine, analysts say. Russia is one of the world’s top producers of oil and natural gas. Fears over disruption to supply from that country, along with sanctions on Russian oil and natural gas imposed by the U.S. and pledges from the European Union to drastically reduce reliance on Russian natural gas, has escalated worry in markets that already tight supplies will become even tighter, driving up prices for the commodities.

61%
The year-over-year percentage increase in Brent Crude Oil prices as of March 11.

(Market Watch)

Some analysts expect fossil fuel prices to remain elevated for months, though an exact time span is difficult to predict, as it can be influenced by everything from the duration of the Russia/Ukraine conflict to how much oil the Organization of the Petroleum Exporting Countries (OPEC) decides to release to the global market.

Regardless, the current run-up on oil and natural gas has potential to impact pricing on promo items, in part, because the commodities are used to produce an array of products, such as apparel made all or in part from polyester, which is typically derived from petroleum. Even more broadly, the plastic that is part of many promo items is made from ingredients that include natural gas and oil.

“Products and packaging material made from plastics will see the greatest price pressure.” Jing Rong, HPG

As the cost of petroleum and natural gas jumps, it means manufacturers have to pay more for those ingredients. Ultimately, those costs get kicked down the supply line to North American promo suppliers, which, despite best-effort mitigation strategies, often have to pass along some of the increase to distributors to keep their businesses viable.

“Products and packaging material made from plastics will see the greatest price pressure as plastics are produced from natural gas, feedstocks derived from natural gas processing, and feedstocks derived from crude oil refining,” says Rong, who adds that HPG is so far holding the line on pricing.  

Dilip Bhavnani, chief operating officer of California-headquartered Top 40 supplier Sunscope (asi/90075) and a Power 50 member, notes that plastics are an essential ingredient in many promo products.

“There are electronics – almost everything is injected molded plastics, including power banks and USB drives,” Bhavnani explains. “Then there’s textiles, including anything made from acrylic, rayon, vegan leather, nylon or spandex. Then we have plastic writing instruments, plastic drinkware, plastic umbrellas and desk accessories, etc.… There are thousands of items that are derived from oil [including products made of fabric materials produced with petroleum such as bags and chairs]. With the increase in oil prices, we’re going to see an increase in product costs and, I believe, an extended period of inflation. These costs will have to be passed on to buyers.”

Rising oil and natural gas prices also ratchet up the expense of operating production facilities and transporting products.

As the cost of fuel rises, it gets pricier to move product by ship and air from overseas manufacturers to promo suppliers’ distribution facilities in North America. The vast majority of promo items sold domestically are made abroad, particularly in China. Notably, the average freight rate from China/East Asia to the U.S. West Coast stood at $16,155 in early March, already up more than 18% form early January, according to the Freightos Baltic Index, a freight rate monitor.

“Manufacturers, while doing their best to manage client expectations, have to increase prices to cover their unknown costs. It’s really not a great situation.” Dilip Bhavnani, Sunscope

Furthermore, once products arrive stateside, domestic transporters may pass along their increased fuel expenses to promo suppliers and others that rely on the trucking and rail companies to move products from ports to warehouses in trucks and trains largely powered by diesel, which is refined from crude oil. The practice increases what it costs promo suppliers to provide a product.

“Freight costs are being greatly affected by the cost of fuel and we could potentially see a large increase in freight prices, which will lead to a higher cost on products within our industry,” explains Bhavnani.

Pierre Montaubin, senior vice president of product management and sourcing at Clearwater, FL-based Top 40 supplier Koozie Group (asi/40480), noted that pricing on outdoor products (specifically chairs) and drinkware categories are already being “significantly impacted by transportation increases because of the inherent size and volume of these products.”

Raw Material Prices on the Rise

Other rising raw material prices could also contribute to more product price increases in promo.

In part due to Russia’s position as a major metal producer, the cost of metals used in various products, such as aluminum and nickel, are accelerating. On March 7, the price of nickel on the London Metal Exchange soared 60%. Nickel is used to make things like stainless steel and lithium-ion batteries, meaning the cost of “everything from cookware to consumer electronics may be about to climb,” Nexstar Media reported.

Cotton prices have increased about
56%
over the last year.

(Markets Insider)

Meanwhile, the cost of cotton was around $1.22 per pound the middle of last week, up 56% from late March in 2021. A U.S. ban on cotton from the Xinjiang region of China, made for humanitarian concerns over forced labor, is one factor in heightened costs for the commodity that’s essential to the creation of many apparel products and other items, analysts say.

Meanwhile, Teresa Fang notes that elevated pricing for certain materials and components has already hit tech products hard. “Items in the technology category have seen steeper price hikes simply because the materials used to make those sorts of products are in short supply and are used in many different kinds of products from automobiles to cellphones to our promo products,” says Fang, vice president of supply chain at alphabroder (asi/34063), promo’s second biggest supplier by revenue.

Things could get worse if material/component prices jump amid squeezed supplies – a realistic possibility in today’s market. As one example, some analysts think neon, which is used in semiconductors, will become more difficult to come by as 70% of global supply reportedly comes from Ukraine. That could lead to increased prices for neon and/or result in manufacturers having to find alternatives, a potentially costly prospect. Down the supply line, that could lead to higher prices on tech products, such as power banks.

Labor & Supply Line Costs Intensify

By now, promo pros are well familiar with supply chain complications that have caused ills like inventory shortages within the industry. Issues tied to supply networks are persisting, and even being further complicated by Russia’s war on Ukraine, as the conflict reverberates through global shipping and air supply lines, complicating routing and raising potential surcharges from freight movers.

The ongoing supply chain issues – which include elongated shipping and delivery times – are putting heavier cost burdens on suppliers, which can contribute to costlier price tags on promo products. “We’re still seeing congestion at ports and trucking shortages that mean companies are incurring higher-than-ever storage and demurrage charges,” notes Montaubin.

Meanwhile, labor costs continue to jump both domestically and abroad as companies compete for workers in a crunched labor market in which U.S. employees are leaving one job for another at historic rates.

Overall, hourly wages in nonfarm private sector jobs across industries in the U.S. have increased an average of 5.1% year over year, according to the most recent federal statistics. Figures show that hourly wages for production and non-supervisory roles in particular rose nearly 7% between February 2021 and February 2022 in the U.S. Heightened labor costs are another part of the equation that can drive up promo suppliers’ product pricing.

“All these inflationary pressures will continue to push pricing up within our industry,” Bhavnani says, adding that uncertainty over “what’s going to happen in the world with Russia, with port congestion, with worldwide wages” is further fueling difficulties.

“With this uncertainty,” he continues, “markets are in a flux and manufacturers, while doing their best to manage client expectations, have to increase prices to cover their unknown costs. It’s really not a great situation.”