April 2011 newsletter editorial:
It would seem appropriate to evoke the spirit of Harold Macmillan and lament “events dear boy, events”. From revolutionary fervour in the Middle East to heartbreakingly tragic earthquakes and tsunamis in the Land of the Rising Sun, there are ripples of consequences that are reaching our shores and our in turn our industry:
· Uncertainty in the Middle East has caused oil to jump to $116 / barrel, which equates to a 45% rise in recent months.
· Many Japanese paper mills are out of action, as are some shipping ports. The latter have adversely impacted the ability to export corrugated waste to China – for whom Japan is a key supplier. In turn the price of corrugated waste is facing renewed upward pressure in North America and Europe as the Chinese look for alternative sources to plug the gap.
In our current situation the fundamentals of price theory suggest that prices will keep going up until enough folk stop buying paper or supply is increased – hence bringing supply and demand into closer alignment. Alas recent events have actually made the situation worse. As such I fear that paper prices face renewed and irresistible pressure to rise again during the course of the summer. If you’re just getting your head around the February / March round of increases and think that talk of another one is unutterably fanciful nonsense I suggest that you partake of a soothing cup of tea and some deep, restful breathing before reading on:
· Mondi have announced Kraft increases of 7-12% across Europe – to take effect in April.
· European market leader Smurfit Kappa has announced €40/tonne extra for recycled grades. Others are doing the same in response to the aforementioned higher input costs.
· SAICA are enjoying increasing success in securing recovered paper for their new 450,000 tonne recycled containerboard mill in Manchester, which is due to open in early 2012. However, this is often being achieved by paying a premium…which suggests that we will see upward pressure on OCC prices in the UK for much of this year.
Economists note worryingly that 10 of the last 11 global recessions have been preceded by a prolonged spike in oil prices. Whilst the world economy is forecast to grow by 4-5% this year, economic theory suggests that every $10/barrel increase in the price of oil reduces global GDP growth by 0.5%. If things get exciting in Saudi Arabia oil is expected by some to hit $250/barrel…which suggests scope for a brutal recession. So it seems likely that the inevitable increase(s) in UK interest rates will lose some of their gathering momentum – as rising inflation, taxes and reduced government spending work in concert to slow the economy.
However – events permitting - the UK is still forecast to grow by some 1.7% in 2011. UK production output was up 4.4% in January, which translated to an increase in corrugated volumes of 2% overall and circa 11% for the sheet feeding market. February saw a degree of stock reduction in the supply chain. More recently, March was a busy month for many box plants – with lead times beginning to extend as:
· Stocks were replenished.
· Some clients stocked up with a view to buying at pre-increase prices.
· We exited the seasonal lull of early quarter one.
Higher volumes do not necessarily imply plain sailing for all packaging companies though. The current price rise is seeing notable push back from some buyers, who are carrying out their threats to shove work out to tender. Whilst many frustratingly find that they are indeed buying competitively, there are a significant minority who manage to secure a saving. There is an accelerating trend of the most competitive box plants outgrowing the market as they pick up business from the less competitive…which is feeding a virtuous circle for the winners as they invest heavily in new kit to cope with higher demand. To be fair, with the likelihood of further price rises this year many seasoned buyers are opting to stick with the devil they know.
Stories abound of major retailers squeezing their suppliers hard…which is causing painfully reduced margins for some. Since the retailers are enjoying the considerable benefit of the rising OCC price when they sell their corrugated waste, you have to wonder why they seem frequently deaf to calls for support on higher packaging costs?
Standing back it is clear that the fittest and smartest will continue to prosper; it’s perfectly possible to make a profit in these difficult times. Whether you need: to improve efficiencies; refresh your sales and marketing; training or help with recruitment - we’d love to help.
In the spirit of fraternity we have updated our Price Rise Briefing which is available free of charge to readers – to help explain prevailing market conditions to clients, colleagues and other stakeholders; whether you buy or sell packaging. All we ask if that you consider making a modest donation to our chosen charitable cause for the new few months – Macmillan Nurses.
Posted Date: 07th Jun 2011