February 2011 newsletter editorial:

The market is now in its seasonal lull and lead times have fallen to a week or less for most box plants. In turn sheet feeders find themselves returning to lead times of 2-3 days. Not surprisingly competitive pressure is heightened as box plants seek to fill their temporarily spare capacity, although the extent of box price deflation is being mitigated by an understandable wariness of further potential for paper price increases in the coming months.
 
However, looking beyond an expected lull in quarter one – I suspect that we’re in for another year of decent growth. I’m not alone…the consensus forecast is for growth in UK GDP of 1.7% this year.
 
I appreciate that my optimism is contradicted by the insular gloom peddled by much of our local media, who point only to rising UK taxes (e.g. increased VAT will raise a net £8 billion this year) and government cuts as policy actions that will take the wind out of the economy’s sails. There will alas be subsequent pain and dislocation for some, but it is misleading to paint this as the whole picture. The world economy is due to grow by 4-5% in 2011, which gives us (as a trading nation) plenty of opportunities if we’re smart enough to exploit them.
 
Corrugated waste prices are going up again on mainland Europe and here in the UK. This trend is likely to continue over the course of the next year for a handful of key reasons:
·         The Chinese will again play a central role – the extent of which is best appreciated when you stand back and look at the long term trend and its implications. The average Chinese comrade is forecast to be as well off as the average American around 2050. That’s the equivalent of another planet’s worth of wealth turning up over the next four decades. If this seems improbable it’s worth noting the progress that Japan made in the four decades following WWII – by the eighties the land of the rising sun had grown to the second biggest economy in the world. Now think about the difference in scale - Japan has a population of 200 million people and China has 1.3 billion.

·         SAICA have only secured 5% of their waste requirement so far – lots more will need to be bid for before they have enough to feed their 450,000 tonne Manchester paper mill, which goes live in early 2012.

·         However existing paper mills and merchants won’t just roll over and readily see their supplies dwindle – they’ll pay more to try and maintain supplies.

·         This all points to a continuing bidding war – where those with the deepest pockets will prevail in their pursuit of old corrugated containers (OCC). I firmly believe that the Chinese will come to secure the lion’s share of our OCC exports in due course. If you think that this is fanciful I would point to precedent elsewhere…they bought 72% of America’s export OCC in 2010. Having begun to run out of options for incremental supplies in the USA, they are turning their earnest attentions to Europe.

·         Hence I suspect that it will be the waste merchants who will face a squeeze and consolidation by bigger fish. It is also likely that further existing UK paper making capacity will be displaced when the new highly competitive SAICA volume comes on stream, although DS Smith’s St. Regis will doubtless remain the UK’s market leader in recycled containerboard.


With Germany using only 2% Kraft and France using 4% Kraft in their corrugated packaging supply chains, it is clear that there will not be enough European recycled material to go around. After all paper fibres can only be recycled 7-10 times before they become too short to be used in containerboard. Therefore more Kraft needs to be tipped into the paper supply chain in due course.
 
In the here and now higher OCC prices have triggered recycled paper price increases of €50-60/tonne by some in mainland Europe; notionally taking effect from the 1st of February. Others will follow suit. The usual negotiation dance will doubtless ensure with buyers…with any increase being implemented by the beginning of March. The UK market tends to lag Europe by about a month, which suggests a paper price rise around the Spring.
 
So do be careful when setting prices that you could be stuck with for any period of time. It remains important to invest in kit and procedures that bear down on your unit cost, and to ensure that you have a sales team informed and capable of handling delicate commercial discussions. With oil also rising in price (driven by many of the same macro-economic issues) plastic-based packaging looks like following a similar upward trajectory in price. If you’re a packaging buyer, now might be a good time to warm up your boss and clients for higher packaging costs in 2011.
 
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.

Posted Date: 07th Jun 2011