March 2011 newsletter editorial:

With the world economy forecast to grow by 4-5% this year, upward pressure on commodity and energy prices is being maintained with a painful inevitability. Said global inflationary pressure has been exacerbated for a while in the UK by the recent rise in VAT. Whilst the Bank of England believes that inflation will rise to 4-5% before dropping to around its 2% target in a year’s time, there is a growing expectation that interest rates will rise modestly from their 300-year emergency low of 0.5%. With 4-5% base rates seen as the neutral level before the Great Recession, the prospect of a 1.25% base rate by the end of the year should not be overly worrisome (most borrowing for us mere mortals is already far above the base rate). On the plus side, savers will see a little light at the end of the tunnel. Market expectation of higher base rates has led to a modest rise in the value of the pound – which will hurt exporters a little whilst beginning to make imports cheaper (thus helping to subdue inflation in due course).

Past experience shows that a financial collapse following an asset-based bubble takes some five years to recover from – assuming that bad banks are cleansed of dodgy debts

and that sovereign debts are tweaked in line with the new level of government revenues. Since the credit crunch started in 2008 that takes us past the Olympics before the nation is likely to be sufficiently healed and we’re feeling good about ourselves.

However, even now there are some 500,000 job vacancies in the UK at any one time – the flip side of creative destruction. As the economy is restructured toward a smaller state and away from unsustainable debt and what can now be seen as illusory levels of revenues from the housing and financial sectors, the nation, companies and individuals alike continue to fix their balance sheets. It’s worth remembering that much of this correction has already taken its brutal effect in packaging – the industry is already leaner and generally profitable. Hence it’s not surprising to note that we’re witnessing a significant rise in investment in machinery and recruitment.

Retail sales were up 2% in January after the December snow and manufacturing continues to power along. The Purchasing Manager’s Index remains in positive territory – strongly suggesting that the UK economy will return to growth in quarter one.

With global corrugated waste prices now at record levels and oil passing $100 / barrel (having increased 24% in recent months), European recycled containerboard price increases of €40/tonne took effect in on the 1st of February. With the usual month’s delay, UK recycled paper price increases of £30/tonne duly take effect around the 28th of February, as did £50-60/tonne increases in white top Kraft. This is the seventh round of increases over the last couple of years – which have seen containerboard rise by circa 80% in price from their utterly unsustainable levels during the depths of recession.

With the added joy of UK factory input cost inflation of 13.4% in January, UK sheet board and box price increases are gathering a head of steam – generally taking effect in mid-March. Early conversations with packaging buyers have generally been received with resigned acceptance, although there will doubtless be the odd significant slug of business changing suppliers. There are a few box makers who are holding back to see what happens to the price of paper. With a further price rise of €20/tonne announced for continental recycled containerboard (to take effect on March 1st), wise heads are waiting to see if it sticks. If so, some UK box plants will go for a single, higher price rise rather than face the disruption of two. Either way prices are heading north once more.

Looking ahead it would seem that the fundamental imbalances in the global packaging supply chain will not be significantly changed by these price rises – hence further increases by the Autumn seem a reasonable bet. Perhaps next year will see some deflation as new paper capacity comes on stream…perhaps, but not yet.

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.

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