The UK market was at its seasonal low in February, although one should avoid any undue gloom…demand was entirely in line with expectations. Indeed, it may surprise you to note that January was actually up some 8% up on the same month last year. Stripping out the effect of an additional working day this January, volume by area was up by circa 3.5%. From a UK manufacturing point of view, the first quarter of 2013 has got off to an encouraging start. If this does not chime with your gut feel I would ask you to consider the following:
It feels quieter for many because they have new kit and the attendant weight of financing / higher capacity making life look quieter and more worrisome. I have clients whose sales are up by a double digit percentage but are disappointed because they’re running out of work by Tuesday on their shiny new machinery. Work continues to gravitate toward those who invest in a lower unit cost. Have you invested to keep up with the reality that is today’s arms race in terms of productivity?
However – unlike the UK – continental Europe tends to have a good February. This year was no different and volumes were pretty good. Against this background there has been a Kraft price rise announcement from SCA of euro 40/tonne in Europe and pound 35/tonne in the UK from 1st March. In turn, BillerudKorsn‘s have announced an increase of euro 40/tonne with effect from the 1st of April, Mondi’s David Hawthorn initially said that they would not be raising prices because of what he saw as a ‘somewhat soft’ market. However, as others piled in with their own increases he opted to change his mind.
Recycled containerboard makers continue to lose epic amounts of money, with DS Smith Kemsley rumoured to have lost pound 20 million last year and a continental paper maker said to be losing a fearsome euro 15-20 million a month. Whilst we have one million new tonnes of recycled containerboard capacity coming on stream this year there are a number of irresistible forces coming together to push prices north:
The sterling to euro currency swing from euro 1.25 : pound 1 down to euro 1.15 : pound 1 is costing European mills some euro 30/tonne on UK business that was already unsustainably low. One million tonnes are exported from Europe at good prices. 525,000 tonnes of capacity have been closed recently. Some efficient German paper mills are 20% oversubscribed but still losing money (suggesting that they need to put their prices up!) European paper stocks are low by historical standards. Similarly, UK levels in January were at a three year low in the UK (circa 7 days).
Hence it’s no surprise that a general recycled containerboard price rise was gradually announced for February implementation:
Hamburger were early when announcing their increase of euro 40/tonne. euro 30-40/tonne looks like sticking on the continent (euro 30 in France, euro 35 in Spain and euro 40 in Germany). Back in Blighty, DS Smith has announced pound 40/tonne from 1st March. To my mind, pound 30/tonne looks like sticking in the UK market, unless the Europeans secure the additional euro 20/tonne they’re gunning for (i.e. a cumulative euro 60/tonne by March), in which case the UK market will most likely be staring down the barrel of pound 40/tonne. It’s worth noting that pound 40/tonne only takes many recycled containerboard mills to break even. Some people say it’s too early to go for a rise…however, how do you keep losing millions (sometimes per month!) when we’re in the midst of a once-in-lifetime credit crunch? To put it another way, how would you go about securing credit for on-going losses on this sort of scale?
At first glance there is understandably little appetite for a subsequent sheet and box price rise amongst independents if recycled prices rises by pound 30/tonne and Kraft prices are static. However, from a shareholder’s perspective, there is little point in integrated paper and box companies putting up paper prices if they’re not going to charge more for sheet and box. If the Europeans push through a combined euro 60/tonne price rise on containerboard and Kraft rises of euro 40/tonne crystallise, do not bet against ripples that lead to UK sheet and box price rises by the Spring. Watch this space.
The UK box market is seeing serious investment in new capacity and improved capability. Whilst it is good news that the industry is investing for the future, it’s worth noting that sensible levels of profitability at integrated box plants are based at least in part on paper prices that are unsustainably low.
The UK sheet feeding market continues to see capacity creep that will collectively affect the supply demand balance:
Onboard are consolidating and investing. Calpack is being closed and moved to the Onboard site in Wolverhampton and they’ve purchased a second 2.2m corrugator, which should be up and running toward the end of the year. An integrated box plant is laying on a new shift on their corrugator dedicated to supplying sheet board. Another two English integrated box plants are dabbling in the sheet market.
That’s at least 100 million square metres of new sheet board capacity, which would rise to 23% of new capacity for the UK market when you tip in CSI’s new sheet feeder later this year or early next. However this plays out…it’ll certainly be 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.