June 2011 newsletter editorial:
The UK economy continues its recovery from the Great Recession. The headlines show that we’re on track for the consensus forecast of 1.7% growth in GDP in 2011 and 2.3% next year:
· The private sector is driving jobs creation – the number of people in employment aged 16 and over increased by 118,000 on the quarter and by 416,000 on the year to reach 29.24 million.
· The unemployment rate for the three months to March 2011 was 7.7%, down 0.1% the quarter.
· The total number of unemployed people fell by 36,000 over the quarter to reach 2.46 million. Those who (like Professor David Blanchflower), were forecasting unemployment of 4-5 million if the government didn’t keep spending at Olympic levels look like the incalculably witless idiots that they are.
· Despite CPI inflation running at 4.0% in March and 4.5% in April, the annual growth rate for total pay (including bonuses) was 2.3% for the three months to March 2011. This suggests that general inflation is not feeding through to higher wages – which continues to give the Bank of England scope to hold off on interest rates rises for a while longer.
Of course with real incomes falling slightly, times are tough for the consumer. However, the days of relying on a debt-fuelled consumer to drive the economy are behind us.
It probably will not have escaped your notice that paper prices are rising yet again. A new round of UK recycled containerboard price increases were led by market leader St. Regis, who announced an extra £35/tonne with effect from late May. Prompted by the same increase in OCC prices, the rest of the major European paper makers (notably Smurfit Kappa, SCA, SAICA and Palm) were only days behind with similar price moves of their own.
In addition the balance of the £60/tonne rise that makers of white top Kraft wanted this Spring has been pushed through. Even more significant is the new round of circa £35/tonne that is being applied to brown Kraft from mid-June, which has been led by Mondi in terms of timing.
Paper mills are enjoying buoyant demand (and are low on stocks) and most sheet and box plants are busy and sensibly profitable. Hence sheet board prices are moving upward from early June and box prices aren’t far behind.
Our market intelligence confirms that there is absolutely no appetite amongst sheet board and box makers for beating packaging buyers over the head with still more price rises. Indeed there is a pervasive floating anxiety that a small but significant volume will be priced out of corrugated and into alternative packaging media. However there is understandably even less enthusiasm for losing money on a terminal scale – and so sheet board and box prices are reluctantly being increased with a weary combination of bewilderment and resignation.
Having now effectively doubled in price since the summer of 2009, when will the tumult in containerboard costs end?
There is a view that we are now at the top of the paper cycle. This school of thought points to the recent reduction in the price of Brent crude oil of $10/barrel. There is a subsequent anticipation of downward pressure on the cost of plastic-based packaging, which they believe will have a deflationary correlation with corrugated. They also point to other commodity prices, which are also falling in price. With paper also being a global commodity, surely containerboard prices should be following in line?
Maybe…but not yet:
· Recovered fibre is in short supply; heightened by the Japanese earthquake.
· A longer term inflationary cause is the fact that a substantial amount of wood pulp is being diverted for energy use (i.e. being burnt).
On balance I think that paper makers are currently anticipating another price rise in the Autumn if the fundamentals that prompted the current round of price rises do not ease.
That does not mean that end users are taking it all lying down. Lots of work is being shoved out to tender – with big slugs of volume moving to the lowest cost provider. If you’re struggling to compete with the super-competitive plant down the road – it may be time to buy some newer kit yourself so that you can make money at the market price. With this in mind we’ve taken the time to conduct a SWOT analysis on a machinery supplier (see page 14).
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 drafted a new 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