May 2011 newsletter editorial:

European paper makers succeeded in forcing through a new testliner price increase of €30/tonne in April, which equates to a fair chunk of the €40/tonne that they set out to ask for. We’ve now reached a significant continental milestone – some grades of paper have risen in price by 100%. So what’s triggered paper makers into this new round of price increases so quickly after the last one in February? The blame can be spread around the following issues:

  • Recycled containerboard remains in tight supply due to high demand relative to available capacity; with the German economy chugging along notably well.
  • This has been exacerbated by a small but frustratingly significant amount of downtime among European paper folk (e.g. Emin Leydier are said to have chosen to be at 75% of capacity and Palm are rumoured to have problems in optimising production. Both are still doing well and are of course good businesses – but the market is missing their latent volume).
  • Global OCC prices continue to trot upward – with the latest spurt resulting from the disruption in the packaging supply chain arising from the biblical tragedy that was the recent Japanese earthquake. China typically sources 14% of its OCC imports from Japan, which for obvious reasons has been severely disrupted. In turn the Middle Kingdom is seeking to plug the gap by hovering up more corrugated waste from Europe and North America.
  • Having reached $125/barrel by mid-April, the price of oil has now risen by some 60% since last Autumn, with its obvious knock-on impact on the cost of moving stuff around.
  • Finally, with so little slack in the market paper makers have passed on their higher input costs…because they can.
  • Hence a fresh round of UK recycled paper price increases of £25/tonne will almost certainly follow the European lead – which I estimate will happen in late May. It’s hard to see how sheet and box prices can resist moving upward again this summer…

However it is not all bad news. On the bright side I got a hug and an autograph from my boyhood hero Ossie Ardiles at White Hart Lane before the Real Madrid game last month. Perhaps of wider consequence, the UK economy is showing encouraging signs:

  • CPI inflation fell from 4.4% in February to 4.0% in March. This gives the Bank of England’s MPC welcome room to contemplate further delay before inevitably raising interest rates from 0.5%.
  • Unemployment for the three months to February fell by 0.1% to 7.8% (i.e. 17,000 down to 2.48 million), which will also annoy gloom mongers everywhere. Yes the public sector has so far lost 125,000 jobs – which is of course incredibly hard for those affected - but too much media coverage fails to explain the full story. The private sector represents 80% of UK employment. Significantly, full-time employment increased by 140,000 on the quarter to reach 21.30 million, and there were 482,000 vacancies in the three months to March 2011.
  • Manufacturing output in February was up 4.9% against the same period last year.
  • At the time of going to press, quarter one’s GDP numbers were expected to show a return to growth for the UK economy.
  • In turn our paper mills are busy and box plants largely profitable, with May’s order books looking encouraging.

Alas a minority of uncompetitive box plants continue to lose volume (and in turn money) and are falling further and further behind their leaner and more responsive competitors. The problem with the credit crunch is that cash is tight…meaning impatient banks and shareholders are no longer relaxed about funding seemingly endless losses. Expect further industry consolidation this year.

A number of food manufacturers are rumoured to be facing an unenviable squeeze. With food and beverage prices falling 1.4% in March as a result of aggressive promotional activity from those lovely retailers and rising costs for the average food company’s supply base – margins are being eroded horribly for some. I fear that you may well need to offer your clients in the food and drinks sector a decent glass of brandy before you broach the subject of rising paper prices…

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 refreshed 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