January 2011 newsletter editorial:

At this point I would advise you to breathe deeply several times and becalm your beating heart before reading on. If you’re a smoker you may want to apply an industrial dosage nicotine patch. At the very least the healing balm of a decent cup of tea is recommended. Ready? Recycled paper prices have just nudged upward again in parts of Europe by around €15/tonne. The early months of 2011 will tell us whether this is an impressively shrewd tactic by paper makers to mitigate potential deflation in the quieter months of quarter one, or if this precedes another indecent paper price rise as we approach the Spring.
 
My own analysis points to further input costs resulting from increased competitive pressure for recovered fibre. At the global level the buoyant Chinese market in particular maintains a strong demand for European old corrugated containers (OCC). At the European level we have large continental paper mills (notably Emin Leydier, Palm and Mondi) hovering up OCC with gay abandon. Here in Blighty SAICA have just acquired a waste collection outfit as part of a perfectly sensible vertical integration exercise designed to supply their new Manchester paper mill. However this waste paper capacity will feed just 5% of their requirement when the new mill is up and running. Hence they have about a year to increase this capacity twenty fold. All of which points to heightened competitive pressure for OCC, and hence suggests that the price of recycled containerboard is likely to remain high next year.
 
The Bank of England has now maintained UK interest rates at the emergency rate of 0.5% for 21 months, and held the size of the Asset Purchase Programme (i.e. quantitative easing) at £200 billion. This stimulus has been mercifully augmented by the pound – which has lost some 20% of its value over the last couple of years. Recent WikiLeaks revelations suggest (among other things!) that the Bank of England is working in concert with the government, with the aforementioned stimulus aiming to offset government austerity. It would seem that the Chancellor was right when he said that The Plan is working. UK GDP has grown by 2.8% over the last year and employment in Q3 grew by 167,000 on the quarter to reach 29.19 million. Encouraging.
 
In turn UK corrugated volumes in the year to October were up circa 2% on the previous year, with sheet feeder volumes up 3% over the same period. However, when one tracks sheet feeder demand in the July – October period, volumes in 2010 are actually lower than the corresponding period in 2009. With KPMG having closed Western Corrugated’s doors early in 2010, the unsustainably low sheet board prices of last year have been gradually replaced with viable sheet board prices. The end result has been a return to the position where integrated box plants once again have a cost advantage for high quantity run lengths against small to medium sized sheet plants. This has prompted a number of sheet plants to migrate into increasingly niche markets – which has helped to yield a bumper year’s profits for most of them.
 
It’s also worth noting that die cut volume (which represents about 35% of total corrugated usage) was up some 10%, which has helped those sites with a die cut bias to weather the economic storm.
 
Despite sky rocketing paper costs, surprisingly few box plants have gone bump this year. With containerboard having risen some 70% since the utterly unviable paper price levels of the summer of 2009, most packaging outfits have seen no choice but to shove their prices up. The result has been that even the erstwhile loss makers have surprised themselves and moved to modest profit.
 
DS Smith has published its eagerly-awaited strategic review following the recent appointment of new Group Chief Executive Miles Roberts. The cunning plan will look to focus on the recycled packaging business, which rather suggests that the office supplies side will be hived off. By seeking to reduce paper manufacturing by 25% over the next three years, it looks like they will seek to be self-sufficient and hence less dependent on non-DS Smith clients. The outcome would then be less reliance on the more cyclical paper business in the UK – which will temper the competitive pressure when SAICA’s new paper mill starts making the good stuff in early 2012.
 
In December a handful of independents found themselves with worrisome holes in their order books where the odd biggish client had flounced off with his volume following the most recent price rise. These box plants started their New Year’s sales early as they set about picking up some ‘quick and dirty volume’. However, most box plants with a focus on FMCG markets were in the happy position of being awash with orders last month, although a significant minority had troubling lead times of 3-4 weeks and a backlog of 500,000+ boxes.
 
All the same, the recent disruption caused by heavy snowfall is likely to have dampened overall UK economic activity at the end of 2010, which suggests that some of the economic momentum may have been lost as we entered 2011. As we see the seasonal 25% drop in volumes in quarter one (compared to the run up to the festive season), hungry integrated box plants will heighten competitive pressure as they seek to fill their newly spare capacity.
 
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