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Raj Bhardwaj: Calm seas for the UK economy but storms ahead for corrugated

February 20, 2014 3 Comments »

The last year has seen a significant uplift in confidence in the UK economy

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  • Overall GDP grew by 1.9% in 2013 (with services, production, exports and the consumer markets all showing strength) and the consensus forecast has risen to 3% growth for 2014 and 3.3% for 2015.
  • The labour market is growing strongly with unemployment dropping by 125,000 in a quarter to 7.2% and a record 30.15 million jobs in the UK employment market.
  • CPI inflation is below the Bank of England’s target 2% and real incomes (i.e. net of inflation) are finally rising for the first time since 2010.
  • The current consumer-led recovery is boosting confidence and likely to trigger business investment, which should fuel the next stage of the upward slope of this economic cycle.  As large UK firms have £500+ billion tucked away in their bank accounts…that’s a lot of potential investment and associated hiring on the horizon.

For once the potential economic headwinds are subdued: the Eurozone remains becalmed after agreement on banking union and the US government even passed a budget for the first time in years. First Stringer Bell and Proposition Joe on The Wire and now the Democrats and Republicans are making pragmatic agreements whilst focusing on what unites rather than divides them; wonders will never cease.

In the corrugated packaging world it was steady as she goes in January…most box plants were busy mopping up their Christmas backlog until the final week of the month when the seasonal lull caught up with them as expected. Indeed, such was the peak in demand that some sheet feeders were quoting a 6-7 day lead time until mid-January.

A couple of previously aggressive suppliers to the packaging distributor market have succeeded in quietly diluting their reliance on this market and pivoting toward end users. With distributors typically applying a 30% gross contribution to cover their modest margin and the logistics costs required for their stock and serve model, the returns for box makers are incredibly thin if you’re not the lowest cost producer. The net result will be a harder life for some distributors.

It’s now eerily quiet in the UK as far as some are concerned, although they are looking at their order books without always appreciating that their capacity has shot up following recent investment. The world is bound to look relatively subdued if you have 25% more capacity and have started to run out of work by the middle of the week on some machines. However, overall UK volumes are a touch higher than they were a year ago and those who have invested are generally making a sensible return.

Low levels of containerboard stocks were replenished over the Christmas break, with merciful respite coming thanks to so many corrugators being on holiday shut downs. There were just over 600,000 tonnes of recycled containerboard stocks in week one across Europe…although this quickly dropped by circa 80,000 tonnes and was nearer 500,000 again by early February thanks to a still buoyant continental economy. With supply-demand balance having been achieved…seemingly everyone is happy (or as close as we get to it in our industry), but will it last?

Mainland Europe is likely to see a circa €30/tonne increase announced in February for implementation in March. In the UK we’re still on track for stable recycled containerboard prices until the Spring, when a circa £25/tonne increase is likely to be requested.

Recycled containerboard makers will probably be able to push their prices up if they want to because of the tight supply-demand balance, which is fair enough.

However, box makers will struggle to pass this on consistently because of heightened competitive pressure arising from capacity creep following recent and forthcoming investment (there are at least half a dozen new corrugator projects under consideration at the moment in the UK). This isn’t paper makers’ fault…but the margin squeeze on some box plants will be very real all the same.

Said box plants simply have to get their heads down and get after their own unit cost and overall productivity to offset a change in a global commodity price that they cannot control. Put it another way…put your energy into the things that are within your gift rather than expending valuable time and energy worrying about the things that you can’t change.

Containerboard price pressure is moving in the opposite direction when it comes to white top test on lower brightness papers, which look like taking a £10/tonne drop in February. Equally, Kraft prices are under some downward pressure…which goes some way to explaining why Smurfit Kappa plans an extended maintenance shut at their 520,000 tonne pa Facture Kraft liner mill in Biganos, France. It’s a sensible opportunity to get after some much-needed maintenance.

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. You can contact him via e-mail: raj@knowitall.co.uk