The main story in the UK corrugated industry remains that of material prices, although another seismic bit of industry restructuring may well be afoot (I may be able to say more next month). In the meantime, a gradual dilution in happiness through the corrugated supply chain is apparent:
Paper makers have forced through price rises and are enjoying higher volumes. This is especially the case in mainland Europe, where there are reports of near-daily requests for higher tonnages. Overall, life is better now that they're generally making modest money. Sheet feeders have at least recovered material increases and in some instances they've made up for recent margin erosion. On the whole, the largest sheet feeders seem to have taken a gentler line, with a slower implementation pace than in the past. All the same, the big three have lost some volume to Prowell and a sprinkling of integrated box plants who have started to dabble in sheet board supply. Integrated box plants are generally making good money, although less than at the peak of last year (when the odd factory was making hitherto unheard-of annual profits in the £7 million range). This end of the market is certainly competitive (and occasionally bordering on feisty) following recent heavy investment in conversion capacity. Box price rises have gone through where there are indexation agreements, but have been surprisingly patchy elsewhere. Notably, a number of distributors have been able to offset the increase by hawking their volume around. Loyal it ain't…but it has proved effective so far. To be fair to them, some of their suppliers have not yet had the courage to ask for a price rise…opting instead to absorb the recent paper price rise rather than risk losing volume when there is so much new conversion capacity kicking about and hence it feels quiet. Some (but by no means all) sheet plants are being squeezed as they struggle to pass on the higher cost of material. Bigger sheet plants have been especially affected as they often have more price sensitive clients and have a greater competitive threat from the integrated sector. It's not all gloom and doom though – some have very successfully managed to slightly over-recover increased material costs.
However, even after the spring increases in containerboard prices – returns for paper makers remain inadequate. Tellingly, Smurfit Kappa Group (SKG) has just closed its two paper machines early at its Townsend Hook site, which represent some 15% of UK demand for recycled containerboard. I understand that SAICA will be supplying lightweight to SKG for 18 months from their new world class Manchester paper mill…which should keep this hungry new capacity content. Importantly though, this will still come from a UK mill and therefore reduce overall paper availability.
Therefore another recycled containerboard increase in August / September seems inevitable. I estimate an impending increase of circa £35-40/tonne on top of the recent £25/tonne that is now baked in. That's a cumulative 10% on material costs for the industry which means that there will be greater need and resolve to increase sheet board box prices this autumn – when seasonal volumes will be higher and hence will assist a price rise push.
In summary, the UK economy is on the mend and the next move in paper prices will be upward. The subsequent box and sheet board price increase will need to be swift and include any required catch up for earlier under-recovery. Buyers who have managed to fend off the last increase need to brace themselves for a cumulative request.
The subsequent options all involve bold management action:
Talk to your customers about their specifications, cost to serve and / or prices. Drastically cut your costs…although for most, a 10% cumulative rise in material costs will be too much to hope to offset through cost-cutting alone. Seriously improve your productivity. A focus on Overall Equipment Effectiveness (OEE) using lean manufacturing techniques is the recommended modus operandi for those who wish to avail themselves of world class best practice. Commercially, I strongly recommend that you adopt price indexation agreements with your customers.
