Containerboard price rises are like buses…nothing for ages and then three come along in quick succession. If you're sat there scoffing at the seemingly incredulous prospect of three rounds of price rises this year, I'm afraid that you're in for a deeply unhappy read. Recycled containerboard supply is remarkably tight for mid-summer, when we have previously seen stocks rise and prices fall:
As well as a typical number of planned maintenance shutdowns this summer, there have been ten that were unplanned…as well as a modest lift in demand at box plants, year on year. At a continental level, a lot of old and inefficient European paper capacity has been taken out, which has offset much of the new capacity to come on stream recently. A significant minority of brown paper capacity has been switched to white test capability. There has also been an increase in the amount of Kraft-substitution across Europe, which has raised demand for recycled containerboard. Smurfit Kappa are looking for extra stock following the early closure of their two paper machines at Townsend Hook. Exporting has also tightened European availability of paper. US dollar-based markets are attractive avenues for UK paper makers, who understandably see this as a useful way maintain a sensible supply-demand balance in Blighty.
The net impact has seen stocks at European mills falling by 63,000 tonnes to 486,000 tonnes (i.e. below the psychologically important 500,000 tonne mark) between early June and mid-July; a drop of 8% in week 28, year on year. Similarly, German mills' stocks reportedly dropped 46,000 tonnes to 190,400 tonnes between early June and mid-July, which is below the 200,000 tonne level that indicates a paper shortage. Indeed, June and July saw mills' production rates running at an overheated range of 102-109%. Nice problem to have for a volume-sensitive business but not so exciting for clients who are being told that they can't have more tonnage. Against this backdrop, it's no surprise that a second round of containerboard price increases is being announced in Europe this year:
Starting with a price correction in Italy…where clients were generously given an entire week's notice by one heroically trigger-happy paper maker. You almost have to applaud their enthusiasm. Hamburger were among the first to raise recycled containerboard prices by €50/tonne from 1st August. It will also forego 15,000 tonnes of output to facilitate maintenance, which doesn't hurt if you want to keep supply tight. Germany's Papierfabrik Peters also raised the price for its brown and white recycled containerboard grades by €50/tonne from August 1. Soon after, pretty much everyone else piled in with their own continental price increase.
Whereas there has usually been a month's delay before the ripple from European price rises crossed The Channel, UK paper makers are only a fortnight behind this time:
Increases of £40/tonne have been announced by DS Smith and Smurfit Kappa, effective from mid-August. With demand buoyant (i.e. relative to supply) and margins still on the weak side, expect paper makers to be firm with the £40/tonne requested.
Looking ahead, if supply is this tight during the summer, it will be even more so when we hit the peak demand of quarter four. At that point, smaller independents need to start worrying about security of supply…for which they should start planning right now.
With the wind in their sails, paper makers are already considering a further price rise (i.e. the third this year) before the end of the year. If you find yourself in a situation where you can sell more than you can make, but you're not making enough money and yet demand is going to go up – why wouldn't you put your prices up? I'm not suggesting it's desirable – but it is bordering on inevitable when the situation relates to a global commodity. That equates to a combined price rise of circa £90/tonne this year (i.e. my educated guess), which would represent a 24% price rise for recycled containerboard from the February low-point by the end of the year.
The UK box market is pretty tough at the moment:
June's volumes were subdued compared to last year, although July showed notable improvement. All the same, box plant margins are generally being squeezed. Up to 10% more conversion capacity has resulted in an inability / unwillingness of some to increase prices so far this year. There is certainly pressure for paper price rises but box buyers often see a pretty soft market. If this wasn't enough, we have more material increases to come. These will need to be quickly and responsibly recovered. For those considering going on a volume push to offset this level of material cost increase, ask yourself how much volume you'd need to mitigate it? (If your Sales Director can't work this out then he / she shouldn't be in charge of pricing for you). It simply won't stack up. Equally, those that didn't increase prices much (if at all) earlier this year are looking at on-costs of £60/tonne cumulatively by Autumn, which is just not sustainable. This will accelerate the pace of business migration from the least efficient to the lowest cost producers.
Despite these headwinds, industry EBITDA is largely holding up via efficiencies and investment. However, the pain is beginning to crystallise for some:
parallels (a POS sheet plant) have gone into liquidation. Remploy have confirmed the closure of their four remaining box plants in Burnley, Portsmouth, Sunderland and Norwich. Some box plants are struggling; the common denominator being that they didn't put their prices up or attend to improving efficiencies.
Further along the packaging supply chain, packaging distributors are reporting an increasing receptiveness to approaches by their sales people to potential new customers – where the common theme is the poor performance of an incumbent sheet plant. Some are suffering extended lead times from their sheet board supplier. There is also the very real contrast between sheet plants who have by and large passed on price rises and distributors who have often been spared an increase by their supply base.
