August 2011 newsletter editorial

There has been a summer lull in European and North American economies for three key reasons:

  • A continuing credit crunch for many businesses (see The Insider on page 25 for implications for our industry).
  • Worries about further sovereign debt problems for peripheral eurozone economies.
  • The Japanese earthquake and subsequent tsunami has also had a significant (albeit temporarily) dampening effect.

Staying on a global scale, inflationary pressure for commodities is easing in some areas, notably:

  • Oil has dropped.
  • Pulp for Kraft is dropping.

Locally, the UK continues the slow but necessary journey away from credit-fuelled consumer and government spending:

  • UK factory input price inflation in June peaked at 17%.
  • Although CPI inflation fell to 4.2% from 4.5% the previous month.
  • The unemployment rate for the three months to May 2011 was 7.7% of the economically active population (down 0.1%).
  • Unemployment fell by 26,000 over the quarter to reach 2.45 million.

The number of people in employment increased by 50,000 on the quarter and by 309,000 on Paper prices continue to show signs of stabilising:

  • There is more paper about – with the odd deal being done to buy some spot volume at a discount. It would seem that the traditional ‘August summer sale’ has returned to the paper market.
  • However don’t get excited – this does not mean a general price reduction.
  • Hence there are some paper mills taking downtime at the moment.
  • Others continue to build their stocks (currently very low) in readiness for the busy run up to quarter four.

So at this stage one would presume that a further paper price rise in the Autumn would be hard to implement?

Maybe not...OCC prices in the UK and USA have unexpectedly risen by circa £5/tonne. In turn one or two leading paper makers are grumbling about needing a price rise in the Autumn.

Whilst this seems almost fanciful in the current climate, it does suggest a resolve to maintain paper prices at current levels through the busy season and into next year.

A handful of usual suspects are obviously troubled by having moved briefly into profit and are almost admirably determined to move back to the warm, familiar embrace of losses:

  • A couple of SME integrated box plant players would seem to be returning to type with the introduction of marginal pricing in the hope of picking up some ‘quick and dirty’ volume.
  • Pricing with a contribution (i.e. sales less paper) around £30/1,000 or 25% is difficult for the leanest to survive on.
  • However these fellas (whose efficiencies are relatively sleepy) will be losing money once they’ve finished paying for pallets, strapping, stretch wrap, glue, ink, distribution and direct labour the year to reach 29.28 million.

Sometimes I despair of our industry brethren. What is the matter with these guys that they get a nose bleed as soon as they start to make money and feel the need to drop their trousers on price? Nutters.

However, most box plants who consistently under-priced before the Great Recession have either gone bust, closed or been acquired. As a result the general level of ambition has risen to one that insists on a modest return.

Somewhat worryingly, ASDA are in the process of trying to delist the vast majority of corrugated suppliers in its own brand supply chain. The remaining approved suppliers have apparently had to yield a 5% price saving for the privilege. I fear that they have not thought-through the consequences.

Please note, I am not one of life’s ASDA-bashers. In fact I think that it’s an excellent company that generally does a lot of good for its clients and communities. Whilst ASDA have every right to prune their own suppliers, it is less clear that a dominant UK retailer should be dictating its suppliers’ suppliers.

To say that many box makers are hopping mad would be a contender for understatement of the century. I would urge those box makers who have agreed to become approved ASDA suppliers to consider whether they want retailers to control their client trading relationships?

With 60-70% of UK corrugated volume going through FMCG channels (depending on your region), this would be a deeply troubling development should other retailers join this purchasing philosophy.

More pertinently, a UK corrugated industry with an average 6% EBITDA would be utterly unsustainable should the other big three retailers also ask for 5% price reductions. Remember, the sobering context is that the big four retailers have approaching 80% of the UK grocery market.

Each box plant will of course make its own decisions - but at least take the time to consider the long term implications of your actions...

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: 06th Sep 2011