November Editorial

He Who Dares Wins

The received wisdom about the state of the market is too often laughably wide of the mark at the moment. By way of example, let me summarise a typical conversation that I’m having with many of our 154 packaging clients at Know It All:

Raj: How’s business?

Client: Things don’t look good…the very wrath of Beelzebub is being visited upon our fair nation’s economy at the moment. We’re up to our ears in fire and brimstone…we’re doomed…doomed I tell you. (I paraphrase colourfully for entertainment value - but the sentiment is spot on).

Raj: Blimey. So how much money are you losing?

Client: Oh we’re making OK profits…but from what you read in the media everyone else must be having a torrid, near-suicidal time?

Raj: Uh-huh? So how is it that most folk I talk to in packaging are making perfectly good profits?

Client: You mean other people are in the same boat as me? Blimey...

When I shared this anecdote whilst presenting a market update at the recent Sheet Plant Association conference, we had 52 different businesses represented in the room. Smiles of relief broke out across the room as people discreetly consulted the guys and gals sat next to them…almost everyone was indeed in a good financial place. It’s important to note that the wider private sector is doing better still.

For much of the media a headline of “things are not that bad for the majority. Be patient - it will take another 1-2 years before the worst of the rebalancing of the economy takes effect” is not a very exciting message; it lacks the immediacy of now. Conversely, excited scare mongering seems to be considered as good copy by the Fourth Estate.

There is no doubt that government employees face an uncertain future – with another 350,000 likely to lose their jobs over the coming three years as the coalition government seeks to eliminate the structural deficit. However, the private sector (which represents 80% of UK employees) is creating jobs…although no longer quickly enough to offset all of the public sector losses in recent months. With 29.1 million people in jobs at the moment, 350,000 lost government jobs equates to 1.2% of the job market.

The flip side of 1.2% of people likely to lose jobs is that 98.8% of people are not likely to lose their jobs. That’s not because the private sector is immune to market forces…it’s because we’ve already endured our brutal clear out during the recent Great Recession.

What troubles me is that people with sensible profits are in danger of being misled and spooked into inaction when it comes to hiring and investment decisions. Have the cool courage to make key decisions based on the facts in front of you rather than inaccurate and irrational sentiment from an excitable media with a wish to hype and sell their message.

The UK box market is largely holding steady relative to last year’s volumes. Whilst the seasonal uplift is keeping most box plants and sheet feeders reasonably busy, the festive rush has not yet matched the heights of some buoyant previous years. However, corrugated plants are sufficiently busy that the degree of competitive pressure is being mitigated and hence the amount of business churn is relatively low.

At the same time paper makers are enjoying capacity creep as they continue the perennial march of productivity. The combination of somewhat higher capacity and volumes a touch lower than usual for the time of year has resulted in a temporary excess of paper. Hence continental Europe is seeing recycled containerboard deflation of circa €50/tonne – aided by a weak Eurozone economy and falling recovered fibre prices (see Jungle Drums).

The UK recycled containerboard market has already seen price reductions of some £15/tonne in October – which is likely to be further eroded by another £10/tonne in November. Looking into the New Year the new SAICA paper mill will come on stream and is likely to displace some volume currently supplied from the continent.

…and so the medium term challenge of running a box plant or sheet feeder moves on to managing gentle deflation. 

To this end I would ask you to lift your eyes to the horizon as far as February. At this point the market will move into its annual six-week lull before picking back up as we approach the Spring. With Nostradamus-like prescience I can see the usual suspects amongst the volume-sensitive end of the market panicking myopically as sales tail off and dropping their trousers on price. High margin volume will be sucked into their businesses that they’ll then be unhappily saddled with the rest of the year. Conversely they could break the habit of a lifetime and simply hang on to some of the margin arising from gently falling containerboard prices. They won’t have to do anything else – profits will continue at a subdued rate for six weeks until lifting back up as the daffodils begin to show themselves.

Posted Date: 01st Nov 2011