September editorial

Sovereign debt worries in the eurozone continue to cause hearts to palpitate. To get some idea of how bad things could get for the most vulnerable members of the euro currency, analysts at UBS predict that the Greek economy would shrink by 25-50% if it suffered a disorderly exit from the euro. To give you some sort of yardstick to put this scenario in its proper context, the UK economy shrunk by 6% from peak to trough during the recent Great Recession. Sobering. Historians worry the bejesus out of me when they note that almost every currency union that has broken apart has been followed by war or a military dictatorship. With this in mind, one has to hope that eurozone politicians awake from their inexplicable torpor and take to the campaign trail. They need to explain to their electorates that they can either spend hundreds of billions of euros now or quite literally risk having to spend trillions later. It’s a no brainer…but intransigent and sometimes irrational hearts have to be won over first. Disaster is far from inevitable; there is a an eminently do-able set of policy decisions that can be implemented (see The Insider on page 26).
 
Whilst the UK economy is certainly witnessing sluggish growth of circa 1.4% this year – it is our service sector that’s being notably hit. The harsh winds of creative destruction have already blown through much of the manufacturing sector. For all the existential worries across the English Channel, mercifully we find UK manufacturing picking up as we enter the busy fourth quarter.  Consequently a bout of refreshingly responsible box pricing is taking hold as lead times begin to extend and estimators raise their margin aspirations. Underlying box demand is being lifted by two other factors:
•          Whilst many companies destocked over the summer (thus softening box demand), they have needed to replenish stocks – which has helped to lift Autumnal demand.
•          The demand-dampening effects of the Japanese tsunami have eased.
 
The occasional summer discounts of £10-15/tonne on recycled containerboard continued into the Fall and look like crystallising into a general price reduction of £15/tonne in early October. Indeed the European market is seeing a reduction of some €30/tonne – with subdued continental demand augmented by the increased supply from the new Prowell paper mill in Germany. Since recovered fibre has not dropped in price – paper makers will see margins fall a touch.
  
As we enter the New Year, SAICA’s new 450,000 tonne recycled containerboard mill will be up and running. This may well lead to a further degree of paper price deflation. Don’t get too excited though:
·         The Mancunian paper mill will be kicking out lightweight papers only. Whilst this is certainly a smart investment that nods to growing market demand for low grammage liners – it will not be making a direct impact on the supply-demand balance of higher grammage papers.
·         Yes the new site will be world class…but year one’s output is only likely to be nearer two-thirds of its eventual capacity; apparently it takes 3-4 years for a new paper machine to really get into its groove.
 
However, before you rush to contact your sheet board or box supplier and ask where on earth your subsequent price reduction is…please remember that Kraft prices have not moved. A key Smurfit Kappa Kraft mill was down for over a month as they tended to a boiler and SCA opted to schedule some planned maintenance in one of their biggish Kraft plants. It would seem that deflationary pressure in Kraft prices has eased as a result. White top liner prices also remain unchanged.
 
Also…ask yourself this question: “did I pay in full for the paper price rises on the way up?” If, like most, you understandably haggled hard and asked your supplier(s) to swallow some of the increased costs on the way up – why not give them a chance to make up some of that margin they sacrificed for you?
 
If you’re a sheet or box plant, it’s worth noting that seasonal volume will drop as we enter February. 2012 may well turn out to be a tricky year thereafter…so why not try and hang on to the extra margin as paper prices nudge downward? It may just come in useful!
 
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: 11th Oct 2011