The European economy is forecast to grow by circa 1.2% this year, given fresh impetus by the €60 billion a month of quantitative easing recently initiated by the ECB. This has caused a significant depreciation of the euro; we’ll consider the impact on containerboard prices shortly.
The UK economy was even stronger than first thought in 2014, delivering GDP growth of 2.8% and making us the fastest growing developed economy last year (Canada 2.5%, USA 2.4%, Germany 1.6%, France 0.4%, Japan -0.1% and Italy -0.7%). The UK is forecast to grow by 2.6% in 2015, underpinned by an increasingly confident consumer and (importantly for box volumes) exports outside the EU that were up 7.3% in the quarter to January 2015. This is a critically important rebalancing for UK exports as the market outside of the European Union represents circa 75% of global GDP whereas some 50% of our exports currently head to the EU.
The situation for recycled containerboard prices is complex:
- With February’s UK prices some £50/tonne higher than mainland Europe’s, our market had become much more attractive to the likes of the big German paper mills.
- Prices subsequently fell in the UK by £10-15/tonne in March and look like falling by another £10/tonne in April, thus wiping out the £25/tonne increase that took effect last Autumn.
- These falls in UK prices are entirely driven by an 18% depreciation of the euro against sterling.
- However, relatively buoyant demand means that only half of the depreciation arising from the euro’s depreciation has been passed on to paper buyers.
- Hence both paper buyers and continental paper makers have cause to be content with the recent UK price reductions; a rare Goldilocks moment to be cherished by some.
- Not so great news if you’re a UK-based paper maker though…so it must come as a merciful relief to see mainland Europe looking to apply recycled containerboard prices of circa €50-60/tonne from April 1st…which will almost certainly prompt UK manufacturers to go for a subsequent rise of their own in the coming weeks.
- Those who believe that the continental paper market doesn’t have the strength in demand to justify a price rise might want to note that Hamburger have announced a new, circa €300 million 450,000 tonne PM; the sort of mammoth investment undertaken only when you and your backers are seriously confident of demand
The underlying strength of European containerboard demand as we approach the Spring is further evidenced by an announced increase in Kraftliner prices by SCA Containerboard and Smurfit Kappa of €40/tonne effective from 1 May.
Whilst studiously minding my own business at an exhibition recently, I was accosted by a small group of unhappy, highly animated box plant owners. They asked whether I thought that the major integrated paper and box companies were colluding to fix the market and generally fill their boots at the expense of customers and (heaven forfend – worse still) the sainted independent sector? Their argument went something like this:
- Those evil integrateds represent the very spawn of Beelzebub. This point was repeated a number of times, presumably just in case I hadn’t grasped it the first five times.
- They selfishly try and get everything their own way and compete horribly hard against everyone, even when it hurts the independent sector.
- The price of everything is subsequently far higher than it should be and there’s no real investment going on.
- There was other poisonous chuntering as well, but that was largely personal and could fill volumes of hugely entertaining Jungle Drums. My solicitor was relieved to know that I’m steering well clear of that particular minefield.
My heart sunk…all I wanted was a decent cappuccino and there was no way this conversation would be wrapped up any time soon. At this point I remembered my advanced Karate training; notably a lesser-known but-still admirably subtle technique called Negash which involves moving out of harm’s way at the very last moment. With an evasion technique that my Sensei would be proud of, I promised the chaps in question that I would carefully reflect upon their query and answer them in print with the objectivity that comes with a view from a distance:
- Rising profits have allowed the major integrated companies to invest some £600 million in paper and corrugated kit in the last handful of years. Corrugated is not a sexy industry and as such does not get noticed at the national level…if Jaguar Land Rover had invested this amount of money it would be all over the business pages of the broadsheets and knighthoods would be sprinkled about liberally. (Arise Sir Andy Barnetson?)
- Average industry margin per square metre has dropped yet average box plant profits are rising, thanks to a 40% improvement in productivity over 10 years – to the benefit of box buyers everywhere.
- The major integrateds don’t owe anything to the independent sector; their loyalty is to their clients, customers, employees and stakeholders (quite right too). Take a deep breath and relax.
- The big three UK players represent two thirds of the market – you’re more likely to come up against them than not. When you do, your own excellent plants (which are among the best around) compete just fine.
- Much like Sir Alex Ferguson, opposing managers took it as a compliment when he started to react and fight hard; you must be doing something right to have the industry’s market leaders worry about you. The market is working well to the benefit of buyers – which is as it should be.
