Some key economic issues impact today’s corrugated market:
- Global imbalances are building as there’s too much money in the world, with a notable net surplus in global savings looking for an investment home. There have also been 637 rate cuts by central banks worldwide and an incomprehensible $12.3 trillion of quantitative easing. Hence interest rates will stay low for a long time – making corrugated investment decisions more accessible.
- The government’s living wage initiative will see the UK’s minimum wage increase 40% by 2020, which will add hundreds of thousands of pounds to many box plant wage bills. Their client base will also apply pressure to box price margins as packaging Buyers are asked to squeeze purchasing costs in an attempt to offset dramatically higher labour costs. Higher incomes will also attract even more migrant labour if we vote to stay in the EU, giving industry a bigger pool of skilled, motivated employees to choose from. Of course that’s not such great news if you’re unskilled and not terribly motivated…
- The pound has fallen 10% against the US dollar and the euro so far this year, a move which accelerated when the charismatic enigma that is Boris Johnson joined the ‘leave’ campaign in the EU referendum.
Reports are coming in of Kraftliner prices falling, although we’ll need to see more data before we can establish the new market rate. This has been caused by an oversupply situation following Stora Enso’s €110 million investment to upgrade a fine paper mill (in Varkaus, Finland), which has introduced 390,000 tonnes of new annual capacity.
The recycled containerboard market is lack lustre in Northern Europe but much busier in central and eastern Europe. The expectation is for a fall of €10/tonne during March, although paper makers are holding out for now at least.
The UK market has been quieter than most anticipated, with little if any growth this February on a volume per day basis, although the extra working day care of the leap year will have helped monthly results. Whilst subdued February volumes would normally prompt recycled containerboard deflation in the UK, this has been offset by the aforementioned weaker pound.
Smurfit Kappa’s rebuilt paper mill at Townsend Hook is said to now be averaging an output of 600 tonnes a day, whilst hitting a peak of 800 tonnes a day when running heavyweights. As a result, SKG are no longer using the spot market, which has freed paper for others to access after a prolonged draught of availability. So far at least, buyers returning to the spot market have not passed savings on in the form of lower box and sheet board prices.
Significant planned maintenance downtime is afoot, with SKG’s scheduled in February; SAICA and DSS in March…which will tighten the recycled containerboard market this month.
Further along the supply chain, the UK sheet feeding market continues to get gradually tougher:
- The new Fosber corrugators at CorrBoard and DSS have bedded in and the additional corrugator at Board24 Preston is up and running. The engineering team at BHS seem to have done a heroic job during the installation and commissioning process for Preston. To universal amazement, their confident prediction that the first boards off the new corrugator would be saleable were proven spot on when a perfect stack of board ambled into view. As well as high fives for Germanic efficiency, Board24 will have the benefit of improved lead times during times of peak demand as well as latent capacity to support its disproportionate number of large, fast-growing clients.
- The second Onboard corrugator is now permanently running as they continue their steady growth; care of their USP of complete flexibility in all things (i.e. competitively offering pretty much any combination of papers, starting from 200m2, at a lead time of just 1-2 days).
- General capacity creep continues as almost everyone gets a little bit faster and better at running their corrugators.
In turn the sheet feeding sector is seeing a small but significant number of prices falling to the cost of production, as well as a narrowing in the gap between prices commanded by biggest and smallest sheet plants. In the medium term, it is going to get harder still in the sheet feeding market as overall demand may also fall as it did in the German market some years ago.
It’s fascinating to note the differing fighting strategies being employed in the box market. For example, Rigid stealthily introduced a new integrated box plant in the South West; taking advantage of new French recycled containerboard capacity within the VPK Group. The agreeably genial Richard Coward has proven to be a tactical and political genius in the mould of a Sugar Ray Leonard. VPK is to be congratulated on an impressive deployment of multi-national vertical integration.
Rather than get sucked into a deflationary slugfest in the South West, DSS opted to close Bristol and back the volume into neighbouring sites whilst strategically counter-punching most competitors rather than one in particular. Gareth Jenkins and his senior management team deserve phenomenal credit for the low key, gradual way that volume was migrated and successfully retained.
Conversely Smurfit Kappa has opted to compete with full on attack for those who dare to mix it with them. Underpinned by a combination of deep pockets (thanks to shrewd financial acumen) and improved depth of vertical integration through acquisition, SKG displays the fighting heart of a Rocky (at the height of his powers) to an admirable degree.
The net result manifests itself in falling industry unit costs and end users enjoying improved competitiveness from a corrugated market that is working well for them.
Raj Bhardwaj is Editor of the Know It All newsletter and offers software and consultancy to the packaging sector. You can contact him via e-mail: firstname.lastname@example.org