Hwa Chuan’s Rising Costs: Tailwind or Pressure? Raw Materials, Depreciation, and Capacity Utilization

Preface

Rising raw-material prices are not automatically bad news for manufacturers. If a company can pass higher costs on to customers, the immediate effect on its earnings may be limited. The larger question is whether higher prices continue through the supply chain and eventually reduce consumer demand. If sales weaken, factories may run below capacity, making it harder to spread fixed costs across production.

Taiwanese beverage-packaging manufacturer Hwa Chuan (宏全, 9939-TW) offers a useful case study. Its experience shows why it is important to look beyond the cost of PET resin and consider pricing mechanisms, product mix, factory utilization, and depreciation. The company’s recent margin improvement also illustrates how stronger output can offset some of the pressure from more expensive inputs. As new capacity comes online, however, sustained demand will be essential to absorb the additional fixed costs.

Lazy bag

Hwa Chuan’s PET-related costs can be passed through to customers over time under its cost-plus pricing arrangements, but this does not guarantee that margins will remain unchanged. Higher selling prices can dilute the gross margin percentage even when gross profit per bottle is preserved. In the second quarter of this year, Hwa Chuan’s gross margin rose to 27.41%, up 5.1 percentage points year over year, as higher factory utilization and a better product mix offset some raw-material pressure. The key longer-term issue is whether beverage demand stays strong enough to keep new production capacity busy and spread its fixed costs.

Main Body

Raw-material inflation can affect manufacturers through more than one channel. The first is direct: when key inputs become more expensive, the cost of making each product rises. The second is indirect: a manufacturer may pass that increase on to its customers, but those customers may then raise prices for consumers. If consumers respond by buying less, the resulting decline in output can reduce factory utilization and increase the fixed cost allocated to each unit. Hwa Chuan’s business demonstrates why these effects need to be assessed together.

According to ICIS pricing data disclosed by Samyang Packaging (三養包裝), South Korea’s largest PET beverage-packaging manufacturer, which also operates aseptic filling businesses, the average price of PET bottle chips reached KRW 1.844 million per ton in the first half of 2026. That was approximately 35% higher than the average for full-year 2025. The increase was driven mainly by higher oil prices amid conflict in the Middle East and China’s adjustment to its export tax rebate policy, both of which contributed to a rapid rise in PET input prices.

PET is the principal material used in plastic beverage bottles. Polyester resin accounts for approximately 55% to 60% of Hwa Chuan’s total costs, making changes in its price significant for the company’s cost base. However, the timing of those changes matters. Hwa Chuan uses cost-plus pricing and can adjust selling prices according to contract terms every 2 to 6 months. As a result, increases in raw-material costs are generally passed on to customers gradually, with an approximate one-quarter lag.

That lag means the cost of inputs and the prices charged to customers do not necessarily move at the same time. While the company is waiting for a contractual price adjustment to take effect, higher input prices can temporarily weigh on results. Once selling prices are revised, the direct effect may ease. Still, passing through an increase does not ensure that the gross margin percentage will stay constant.

A simple example illustrates the distinction between gross profit per item and gross margin. Suppose a bottle initially sells for 10 yuan and costs 7 yuan to produce. Gross profit is 3 yuan and the gross margin is 30%. If input costs rise by 1 yuan and the selling price also increases by 1 yuan, the bottle sells for 11 yuan and costs 8 yuan. Gross profit remains 3 yuan, but the gross margin falls to 27.3%. The company has preserved the gross-profit amount on each bottle, yet the margin percentage has been diluted because both sales and costs have increased.

Hwa Chuan’s second-quarter results show that raw-material inflation is only one part of the margin equation. Its gross margin increased to 27.41%, an improvement of 5.1 percentage points compared with the same period last year. The main drivers were higher factory utilization and an improved product mix. These factors helped offset some of the unfavorable impact of higher raw-material prices.

Factory utilization matters because manufacturers carry fixed costs that do not automatically fall when output declines. Depreciation on equipment and some labor expenses remain even if fewer products are shipped. When production and shipments increase, the same fixed costs can be allocated across more units. The average production cost per bottle can therefore fall, supporting margins. Conversely, lower output can leave a larger fixed-cost burden on each item, even if input prices have stabilized or have been passed on to customers.

Demand and product mix contributed to Hwa Chuan’s improved operating conditions. High temperatures this year helped lift the company’s shipment volume in Taiwan by 7% to 9%, while shipments in Southeast Asia grew by 25% to 30%. In addition, customers with higher margins made up a larger share of the company’s business in China. Higher volumes supported fixed-cost absorption, while the improved mix raised the contribution from more profitable products. Together, these effects were sufficient to counter some of the pressure from higher materials costs, helping the margin rise rather than fall.

The next question is whether beverage brands can pass on their own higher packaging costs without weakening consumer demand. Hwa Chuan may be able to pass PET cost increases to beverage companies, but those companies may in turn raise prices for consumers. If that leads to lower sales, packaging suppliers could ultimately face reduced orders and lower utilization.

Coca-Cola Bottlers Japan Holdings (可口可樂瓶裝日本控股, 2579-JP), Japan’s largest Coca-Cola bottler, illustrates this risk. The company said that conflict in the Middle East increased its costs by approximately JPY 2 billion to JPY 4 billion this year. In the third quarter, costs for PET bottles and other packaging materials increased by approximately JPY 2.5 billion. In September, the company raised prices again, increasing the price of major products by 4 to 5 yen per bottle. Nevertheless, sales volume declined by 1% year over year in the first three quarters, and the company estimated that October volume would decline by another 1% to 3% year over year.

Japan’s experience should not be taken as a proxy for global demand. The Coca-Cola Company (KO-US) reported that global third-quarter volume increased by 5% year over year and organic revenue grew by 7%. Volume in the Asia-Pacific region increased by 6%, while several markets in China and the Association of Southeast Asian Nations also continued to grow. In Japan, weaker volume was also affected by poor weather and cautious consumer spending, so price increases cannot be treated as the sole explanation.

At the same time, continued global growth does not mean price increases have had no effect on consumers. The company’s management said during its earnings call that affordability is becoming an increasingly important consideration. To support purchasing interest, beverage companies may need to adjust product and packaging strategies, rather than relying solely on higher prices. For example, the company has promoted more affordable single-serve packages in Vietnam. These packages have reached more than 400,000 sales outlets and have recorded a high repurchase rate.

This example highlights the range of choices available to beverage brands. Adjusting package sizes, changing the product mix, and adopting price strategies suited to local consumers can help maintain demand as costs rise. Whether these measures succeed matters to packaging manufacturers, because brands’ retail sales eventually influence their orders for bottles and other packaging. Cost pass-through may protect a supplier’s per-unit economics, but it cannot by itself guarantee the volume needed to keep production lines fully utilized.

For Hwa Chuan, this issue is especially relevant after capital expenditure reached a record high in 2025. New production capacity is being brought online, and the associated depreciation and other fixed costs will increase. While raw-material inflation can be passed through gradually under pricing arrangements, the fixed cost of additional facilities must ultimately be supported by sufficient shipments. The more output the new capacity generates, the more effectively those costs can be spread across products.

If beverage brands can adapt their pricing and packaging while maintaining sales, Hwa Chuan may continue to secure packaging orders and improve utilization at its new facilities. If end-market demand weakens and shipments decline, however, the company could face pressure on gross margins even after successfully passing on higher PET costs. Lower utilization would make the fixed-cost burden per unit more difficult to absorb.

The broader lesson is that assessing raw-material inflation requires more than measuring how much input costs have risen. Investors and industry observers also need to follow how pricing changes move through the supply chain and whether final sales remain resilient. Cost pass-through affects whether a manufacturer can preserve gross profit per unit; shipment volume determines how effectively it can allocate fixed costs across production. For Hwa Chuan, which is expanding capacity, the second factor deserves particular attention.

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