European recycled containerboard makers’ price rise ambitions have been whittled down to €30/tonne…having initially asked for a much-needed €100/tonne the industry has been thwarted by a modestly rising imbalance between supply and demand.
The UK market has seen similar forces eventually mitigate a requested £50/tonne to £15/tonne in many instances and £25/tonne in some, depending on where prices were when negotiations started.
With the benefit of hindsight, recycled paper makers have at least put a floor under prices that were in danger of falling further over the summer. Paper prices in the first quarter of next year are likely to come under downward pressure as new capacity in Eastern Europe and Turkey is switched on, although:
- There is no real spare containerboard capacity in Western Europe, which suggests that deflation will have greater impact in the East of our continent.
- OCC exports to China seem to have lifted…something to watch as we exit this year.
In light of the new UK sheet feeder announced to go live in quarter four of 2013, I have to admit to more than a little trepidation as we anticipate an inevitably disruptive additional 12% capacity in this circa 1.28 billion m2 market.
Having met their Vice President of Sales whilst in Atlanta for SuperCorrExo, I have no doubt that US-based management consultancy CSI (who will be managing the UK sheet feeder) are a responsible outfit who have no interest in selling at a loss. Equally, it seems reasonable to expect the 5-6 reported partner sheet plants who will co-own the new sheet feeder to want their doubtless expensive new asset to show a healthy return…one would imagine that supplying and buying board at competitive but sustainable levels is their understandable objective.
However, it is the potential second order consequences that make for a would-be tale of forlorn sorrow:
- Whilst nobody really knows who the partner sheet plants will be, it is reasonable to expect them to already be price sensitive when it comes to sheet board. With this in mind, I’d bet my bottom dollar that Prowell will lose a significant slug of volume when the new sheet feeder is up and running. Whilst Prowell have begun to make money, sheet feeders are very volume sensitive…and they’ll be anxious to replace lost volume.
- Prowell lost over £5m in its first year of operation as it sought to win market share from competitors. Whilst CSI will start with some 60% of its capacity filled by captive volume from its sheet plant owners, it won’t have the benefit of a competitor as weak as the now expired Western Corrugated was. Indeed, the big three existing UK sheet feeders (Board24, Abbey and Smurfit Kappa) are world class players. Just as Walmart were surprised at the quality of competition from the likes of Tesco when they acquired Asda, new entrants like Prowell and CSI should be wary of underestimating the existing market leaders.
- So – at this stage at least – deflation in sheet board prices looks likely to accelerate late next year. In the final analysis, I have no doubt that the new sheet feeder will displace the least efficient sheet board capacity if it’s built as planned. The question is whether this capacity is taken out in an orderly way or after the maelstrom of market forces blows it away.
However, perversely a greater harm is likely to hit sheet plant margins. The introduction of Prowell saw board prices fall off a cliff…and box prices followed suit. The problem was that the industry ended up giving away far more than the cost of the material reduction:
- An unsustainable drop of say 15% in sheet board prices would lead to a dramatic increase in the percentage of business a given sheet plant would win. You may think that this is a good thing…but it’s worth remembering that the same sheet plant will see a dramatic increase in business lost as their competitors would also be buying at a suddenly lower price. End result: rapid sheet board deflation leading to precipitous margin erosion for box plants.
- Before those of you in the integrated box market decide that this is of little relevance to you, I would highlight that the cost advantage you have in your corrugator would be eroded. Hence some integrated volume would be sucked into the sheet plant market and cause a deflationary supply-demand imbalance for volume box plants.
- Distributors would also see volume lost to the sheet plant sector…with the weakest going to the wall.
- It doesn’t have to be this way…by all means pocket falling material prices if and when they arise. However, DO ensure that the board price list that you base your selling prices upon is sustainable and hence ring fence your hard won margin.
- It also makes sense for sheet feeders to try and tie their clients to long term contracts!
To be fair I shouldn’t over egg the doom; the harshest effects of this new capacity will be felt most keenly by the 31% of the UK corrugated market that is sheet feeder-related. The rest of the market will feel some disruption…but not to the same extent.
In the meantime enjoy the next year or so…with industry EBITDA hovering around 8-10%, these are the good times. Indeed, when you know there is a potential storm on the horizon it seems an appropriate time to invest in lowering your unit cost through targeted investment in kit and people.
Whatever you do…life will certainly be even more interesting!
Raj Bhardwaj is Editor of the Know It All newsletter and runs a training, consultancy and recruitment business (Consult It All) with a focus on the packaging sector.