Despite a tough year for the wider European economy, the biggest integrated paper and box making companies have managed to maintain their overall profitability through their scale, cost control and commitment to added value propositions. Notably, Smurfit Kappa and DS Smith have also made progress in their underlying financial strength and market footprint through acquisitions. For its part, Mondi has maintained profits by allocating capital in the most lucrative markets and making much of its paper efficiently in what are also low cost countries in Eastern Europe.
Paper companies with Kraft capability have seen profits recover following recent Kraft containerboard price rises of circa £50/tonne. Similarly, recent white top Kraft liner and semi-chem fluting price rises look likely to stick for the coming months at least. Once we get to the spring a handful of biggish shutdowns will return to production and Kraft supply should pick up somewhat…which should take the edge off inflationary pressure. All the same, as it stands the emerging daffodils should see in a Kraft liner price increase next year.
However, many mid-sized recycled containerboard companies have seen profitability fall by 20-50% in 2012 as the supply-demand balance remains out of kilter at the European level. They have only partially recovered their requested €100/tonne price increase and are thus reluctantly beginning to take out unsustainable capacity. For example, Hamburger is closing its paper mill in Frohnleiten, Austria. The November increase in OCC price levels of €15/tonne in Europe and £10/tonne in the UK can’t have helped margins or moods amongst recycled paper CEOs.
Smurfit Kappa’s CEO Gary McCann rightly points to a background where he expects recovered paper costs to continue their “long upward trend” and hence drive the need for further recycled containerboard price rises in 2013. The rest of the industry will not be immune to these same market factors. Hence I expect a push for a circa €50/tonne increase to start as early as February next year.
DS Smith has been incredibly canny – its acquisition of SCA Packaging now gives it balance in terms of the recycled paper it makes and sells…and hence far less exposed to the paper price cycle; which can only be good for its shareholders.
CEO Miles Roberts and his team are doing a sterling job of delivering subsequent improvements and cash that run into the hundreds of millions. Better still, DS Smith are ahead of schedule in delivering what once looked like ambitious numbers. I suspect that the strategic partnership with the tough and exceptionally profitable folk at RockTenn will also yield significant benefits in due course; both sides have chosen their partners well.
Next year will see quarterly mini-cycles in recycled paper prices as producers try to keep margins above breakeven whilst fighting growing over capacity (recently estimated to be 1m tonnes over the next five years in Europe). January will see downward pressure; I expect prices will drop below a sustainable level for most, which will prompt an understandably big effort from February and March to raise them again. Prices will probably drop again over the traditionally weak summer holiday period before again having to rise from the autumn as we head for the seasonally stronger Q4. The net result of this will probably be a year at breakeven (or just above) for recycled paper makers unless they step up their commitment to managing and consolidating capacity.
Having failed to adequately manage recycled containerboard capacity in 2012, I suspect that this will see more focus next year and hence deliver better results. By way of example, Mondi have grasped the nettle by acquiring a 100,000 tonne paper mill only to promptly announce its intention to close it.
If others take out another 800,000 tonnes of the least efficient capacity we’ll again have a market in broad balance and subsequently rising paper and box prices. Recycled paper makers will have further ammunition when seeking a price rise when one considers the widening differential between recycled and Kraft liner prices at the moment.
The UK will see more box plant consolidation in 2013, with a handful of strong players chasing an ever-smaller pool of acquisition targets.
The unusually longish run of relatively high box plant profitability (admittedly only high when put against a miserably low long term average) follows a critical mass of consolidation caused by the brutal aftershock of the Great Recession. The remaining players are split into a majority who are generally well run and investing in new kit and those few who are losing money and clients at a worrying clip. The on-going credit crunch will make it hard for the latter to hold out much longer if a sheet board and box price rise is triggered by paper makers succeeding in better managing capacity relative to demand. Box plants losing money should aim to fix, close or sell before we get to the spring or risk shuffling off this mortal coil next year as Darwinian forces continue to take their effect.
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.