September editorial

In terms of the world economy, it is safe to say that things are looking really rather glum. We are potentially staring into the chasm of two tragic problems which are brewing nicely in the USA and the eurozone:

US growth is looking so worrisome that the Federal Reserve Bank has promised to keep interest rates at close to zero until at least mid-2013 and has effectively kept open the option of printing more money. Since Fed Chairman Bernanke literally wrote the book on the Great Depression I find this a troubling prescription; he must be really worried.

Of more immediate concern is the eurozone sovereign debt crisis. Make no mistake, there is potential here for another credit crunch…and (joy of joys), this one could be even more epic than the first one. Lehman Bros prompted credit crunch 1.0 when it went bust with $613 billion (£383 billion) of debts. Remember when £383 billion was a lot of money?

This time around the susceptible eurozone governments (Ireland, Greece, Portugal, Spain and Italy) owe nearly ten times more at €4 trillion (£3.5 trillion). If eurozone politicians dither for much longer France may well get sucked into the sovereign debt crisis; interest rates on their government bonds are already beginning to rise alarmingly.

We’re reaching the stage where either the leaders of the Eurozone agree to much deeper fiscal union (i.e. the richer countries set up a mechanism to effectively transfer money to poorer countries in much the same way as the UK’s Barnet formula moves funds around the UK) or the eurozone breaks up and a goodly proportion of the €4 trillion becomes a heroic problem - directly or indirectly - for banks pretty much everywhere.

Conversely, worries about softening levels of global demand for commodities and the potential for less political volatility in Libya is helping to ease the price of oil...which should feed through into lower fuel costs for all in due course.

Back home the UK market witnessed August paper volumes down some 5% against June’s run-rate. Whilst an element of this was due to seasonality (with millions of our countrymen abroad on vacation) it is clear that underlying demand is also down a touch. There was less recovered fibre (OCC) collected from small-to-mid-sized retailers - indicating lower consumer spending. With high inflation effectively making us poorer...this is not overly surprising. I also believe that there is an element of destocking in industrial supply chains going on - as companies seek to hang on to cash because of the prevailing economic gloom. However, there is likely to be a bounceback when stocks need replenishing in the coming month or so - which will coincide with the seasonal uplift in the run up to Christmas.

In the meantime the resultant spare paper capacity has led to some spot buying of paper. Indeed some paper companies have been issuing credit notes of £10-15/tonne, although this is a far cry from a general price reduction. Despite the patchiness of credit note distribution and the fact that the majority of box plants have not seen paper prices fall at all – the RISI PPI index alled a £15/tonne price reduction on brown testliner in August. In my view PPI have been oddly premature in announcing a price reduction at this stage.  With significant box volume on price indexation agreements linked to the PPI index, many box plants will see a squeeze in margins later this year as quarterly reviews automatically trigger box price falls that won’t have corresponding paper falls. £15/tonne may not sound a lot, but it adds up in a high-volume environment.

As if box plants needed another challenge, the churn rate amongst their clients is high, with significant volume continuing to change hands:

SAICA is understandably seeking to fill the gap from volume lost to Smurfit Kappa – which has now largely completed its migration. To be fair, SAICA are rumoured to be in a good place just now (see Jungle Drums).

Like everyone else, Smurfit Kappa continues its new business development drive – in part responding to anticipated customer losses following ASDA’s change in purchasing strategy regarding corrugated in its own brand product range. Smurfit Kappa remain a sane, stable and margin-led business - they will doubtless continue to seek work at competitive but viable levels.

Similarly, DS Smith continues its enduringly effective formula of stealthy, organic growth.

We also have the added spice of the odd independent box plant rushing out to pass on spot paper price decreases.

For now though, whilst the volume end of the market could be busier, most box plants are generally profitable; notably those exposed to industrial and POS markets.

Whilst it’s understandable to be apprehensive about the economic outlook, it’s worth remembering that you’ve already successful steered your business through- and this time you’re leaner and better placed to weather another storm.

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