The UK economy looks to have returned to modest growth, with the Purchasing Managers’ Index indicating expansion in December and retail sales in January 4.4% up on last year.
In turn, volumes for sheet feeders and box plants are holding up in line with seasonal expectations for most.
With UK inflation falling and looking like hitting 2% or less later this year, consumers should see growth in real incomes for the first time in four years.
Throw in another £50 billion of quantitative easing by the Bank of England over the next three months (bringing the total to £325 billion or 22% of GDP) and the Olympics this summer…and the Bank’s forecast of 1.2% GDP growth in 2012 seems eminently do-able barring a Eurozone or wider geopolitical shock to the global economy.
Even then, since the ECB lent over €1 trillion euros to Eurozone banks at 1% interest over three years and promised to lend another €500 billion if necessary, another credit crunch is much less likely.
The price of UK corrugated waste (OCC) has now risen by circa £20/tonne. Despite this, the price of recycled containerboard has dropped by approaching £100/tonne in the UK since its peak, thanks to an adverse supply-demand balance.
However, much of this paper decrease has not been passed on to box and sheet board buyers…which will prove to be just as well for all concerned as containerboard prices begin to recover almost all of their lost ground over the next few months:
With higher OCC costs, lower prices and the subdued volumes that accompany this time of year…paper makers are largely cash negative throughout Europe.
Hence our continental cousins confounded themselves (as well as their initially feisty and sceptical client base) by taking downtime and successfully pushing through a €60/tonne increase in early February (of €100/tonne requested).
As is the way with paper folk, a successful price rise has stoked confidence…and they’re looking for at least another €20/tonne in March as they aim to reach their €100/tonne target.
The same economics have prompted UK suppliers to respond in kind:
- Several UK and continental suppliers have announced a recycled containerboard price rise of circa £40/tonne with effect from mid-March. For good measure, they’re also looking for £30/tonne on white top liners.
- UK players will doubtless be keeping a close eye on the progress of the second continental price rise…expect another £40/tonne in the UK before the summer if the mainland Europeans succeed.
- They’ll also be watching SAICA’s response as they seek to fill their new UK paper mill, which is apparently going rather well having been successfully commissioned in January. By my sums SAICA will sell circa 200,000 tonnes into their own UK box plants this year and look to sell another 50,000 tonnes to the rest of the market; including exports.
- On balance, I suspect that SAICA will be responsible and follow the continental lead. It will be fascinating to see if SAICA will expensively follow the likes of SCA, Danisco, Amcor and Mondi in and out of the UK market…as it happens I suspect that SAICA will be different; appointing the eminently competent Brian Lister to head up the UK business augurs well.
For all the intrigue and yo-yoing paper costs, the short term practical upshot for most box and sheet board buyers should be largely unremarkable…why should they see much of a price increase when most did not see much of a decrease when paper was on the way down in recent months?
Integrated box plants and sheet feeders have enjoyed the briefest of spells with somewhat enhanced margins…and to their credit a great many have used the proceeds to invest in new kit and capability.
Hence we have seen relative price stability for box and board buyers coupled with significant investment; “everyone’s a winner” as they say in my native London.
In the long term though, SAICA are likely to grow market share as they exploit the competitive advantage accruing from their huge investment in lightweight liner capability and new BHS corrugators at Thrapston and Wigan in particular. The received wisdom is that they’ll be able to make some darn fine board out of 70 gsm liners…
With DS Smith having also invested in lightweight paper capability, this looks like potentially leaving Smurfit Kappa at a competitive disadvantage in the UK.
Hence it is no surprise that they have decided to commission the 300,000 tonne 5m Italian lightweight paper machine that they currently have sat in boxes.
The second order consequences are likely to be significant…as Smurfit Kappa replace its two 4.4m paper machines at Townsend Hook to avoid flooding the market with capacity.
Hence side run tonnage is likely to become scarcer…with those independent integrated box plants who rely on this likely to lose some of their £25-30/tonne competitive advantage. Since these fellas already struggle to make a consistent living over the paper cycle, expect further market consolidation next year.
Raj Bhardwaj runs a training, consultancy and recruitment business with a focus on the packaging sector and is Editor of the Know It All newsletter.