July newsletter editorial
UK economic news has been curiously mixed, which would doubtless have tickled Churchill – who was heard to note "If you have two economists in a room you will have two different opinions, unless one of them is Keynes, in which case you will have three opinions."
• Private sector employment is up 520,000 over the last year. Indeed unemployment fell by 88,000 in the most recent three months to 2.43 million. With unemployment falling to 7.7%, this is the largest quarterly fall in unemployment since 2000.
• The 300-year low 0.5% UK interest rate is afforded for a while longer by government spending cuts and subdued wage growth (1.8% in the year to April).
• Hence recovery from the Great Recession is softened as mortgages remain mercifully affordable and jobs growth continues.
• Conversely business investment fell by 7.1% by Q1 and 3.2% in Q2. Hence firms are happy to hire but not yet ready to invest in earnest.
• This suggests that there is still post-recessionary capacity in the economy, and that accessing finance for investment remains a bottleneck for some. It also points to a lack of confidence in the future at the moment.
• Retail sales were down in May after the Royal Wedding-related peak in April. Of longer term consequence, real incomes are being squeezed by inflation and tax rises.
UK factory input price inflation in May was a whopping 15.7% and CPI inflation in May was 4.5%. In turn, sheet board and box prices have risen in June and early July:
• Generally recovery of the price increase has been successful – but has left a bitter taste with some end users who are facing severe pushback from retailers.
• Big accounts continue to go out to tender with a view to market testing, with the odd ‘biggy’ changing hands.
All told though, UK box plant profitability has improved from an average 2% ROS to 6% in two years; largely resulting from box plants closing – and hence a more balanced supply-demand situation.
However, looking ahead I now anticipate paper prices stabilising:
• The Japanese economy is recovering from the March 11 earthquake and tsunami. Hence the supply chain for waste paper exports is recovering and Chinese buyers are less active in Europe.
• There are a handful of European paper mills taking downtime at the moment, which is helping to take some of the heat out of demand for OCC.
• Hence European paper mills are finding it easier to source corrugated waste.
• In turn the price of OCC in Europe is forecast to drop by circa €10-20/tonne in the coming weeks.
• However the UK’s OCC prices seem unlikely to follow due to the sterling : euro exchange rate and the continuing high level of OCC exports to the continent.
• So a further paper price rise in the Autumn looks hard to envisage, although the Chinese are likely to re-enter the European market in August as their demand picks up and we approach the busier period of the year.
Don’t get excited though as paper prices are not likely to fall off a cliff:
• Whatever is happening to the price of OCC, paper supply remains tight.
• Which suggests that paper makers’ margins will improve in the coming months.
• Hence paper price stability seems the likely short and medium term outlook after this current round of corrugated price rises.
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: 14th Jul 2011