February editorial

2012: calm seas with ice bergs that you can plan for

It would seem that we’re set fair for another eventful year…

Standard & Poor’s nine-country credit downgrade kept up the steady flow of fuel on the fire that is the eurozone sovereign debt crisis. For journalists this remains the story that just keeps on giving and will doubtless continue to act as a drag on Europe’s recovery until it’s resolved one way or the other.

However, geopolitics will also play an unwelcome role this year as Iran apparently closes in on nuclear weapon capability. With oil generating 65% of government revenues, some amongst the Iranian authorities are set to declare an EU oil boycott as an act of war and are subsequently threatening to block the Strait of Hormuz; cutting off 19% of the world’s daily oil needs. The US, UK and France have sent two aircraft carriers (with more planes than the Iranian air force) and a supporting fleet through the 34-mile wide channel to demonstrate what the MoD calls an “unwavering international commitment to maintaining rights of passage under international law”. With a 20% risk-premium already built into crude oil prices, the world is currently paying $710 billion over the odds for oil as a result of this issue.  The practical upshot at home is that UK inflation will linger for longer and hence continue to constrain the consumer. At the risk of being parochial, plastic-based packaging is likely to rise in price and favour corrugated use. However, for everyone’s sake one can only hope that a swift and peaceful resolution is reached.

The microcosm of the packaging industry is in a generally better place than the wider economy – although not without its own trials and tribulations. We’re going to see the next stage of industry consolidation this year:

• The eminently sane and stable folk at DS Smith have added even more ambition to the genetic code of their business…their proposed acquisition of SCA Packaging will give them a European footprint to rival that of Smurfit Kappa. Even so, Smurfit Kappa would remain European market leader with a 17% share in containerboard and 20% in box, whereas DS Smith and SCA Packaging combined would (after a rights issue and what I suspect will be a cakewalk in terms of regulatory approval; see lead article on the next page) come to a happily symmetric 16% on both paper and box. It’s a ground-breaking deal for DS Smith…the synergies and opportunities for market leverage are obvious.
• In the round though, it’s also a good deal for customers; pan-European corrugated buyers will have an alternative to the hitherto mono-choice of the excellent Smurfit Kappa, who have been the only show in town since SCA lost interest in volume box-making and started selling off their integrated box business.

Recycled containerboard has now dropped £55/tonne since the price peaked last Autumn thanks to an oversupply in the market. The odd bit of unsustainable spot volume from Germany is available for even less in the UK as they seek to run for cash during the seasonal lull, although this is not available to bigger buyers who are locked into longer term agreements that served them well when paper was scarce and will doubtless do so again in future. It's worth noting that continental recycled paper makers are signalling a whopping increase of up to €100/tonne from early February as they seek to redress utterly unsustainable prices and haemorrhaging losses for the less efficient paper mills in Europe. They may not achieve all of this…but the next move is likely to be upward.

Hence UK integrated box plants and sheet feeders are understandably reluctant to pass on all of the recent decreases as they note upward price pressure begin to build. To add to the head of steam, the price of OCC went up circa £10/tonne in January and is likely to do so again in February. Hence paper makers will see a £30/tonne adverse swing in UK margins in the first two months of the year. When you’re producing hundreds of thousands of tonnes of paper…that’s a level of pain which will almost certainly resolve itself into a price rise around the Spring. The lesson seems to have sunk in that box price stability has to be preferable to a price reduction that lasts only a few weeks.

Indeed sanity seems to have taken hold in another UK arena. For the first time that I can remember, box plant pricing is generally sustainable across the market in quarter one and only the odd fool seems to be trying to suck in volume at daft prices in anticipation of a quiet February. With an average corrugated industry EBITDA of circa 8%, most are making an OK (but hardly exorbitant) return and have concluded that they’ll scrape a profit in a quiet February without the need to hoover up marginal volume.

However, many are using the opportunity to invest in new kit, people and training as they seek to get leaner still for the year ahead. Bravehearts indeed.

Posted Date: 01st Feb 2012