The Western and Eastern European market is finding recycled containerboard in increasingly tight supply:
The sun has been shining in much of Europe and demand is up…helping to bring the Eurozone out of a long recession. Testliner demand is notably up this year by: 4% in Poland; 2% in the Czech Republic; 2% in Hungary and 6% in Turkey. However, the main driver for tight supply at the continental level for this 25 million tonne market is the additional circa 500,000 tonnes (i.e. 2% of the market) newly being exported. Whereas in the past export prices may have been at marginal rates to help fill latent capacity, today the same price is realised whether you deliver export tonnage to the nearest port or a 'local' delivery to the other side of Europe. The counter-intuitive result is that the distribution cost of exporting is often lower to foreign markets that are growing strongly (e.g. key Middle East economies grew by circa 5% in quarters one and two). Parochially, it's worth noting that the UK is certainly less attractive than exporting from mainland Europe; a situation not helped by currency movements.
This development has been amplified by Smurfit Kappa Group's (SKG) decision to take out its two 240,000 tonne pa paper machines at its UK Townsend Hook site. I understand that SKG were losing millions (plural!) each month at this paper mill. As such, it would seem that an entirely sensible wish to stem unsustainable losses was the key driver for this decision, rather than some Machiavellian plot to manage the supply-demand balance. All the same, it was an eminently responsible decision that the rest of the paper industry should be relieved someone had the courage and financial strength to implement.
Hence recycled containerboard prices are going up in the UK for the third time since last Autumn, with £40/tonne taking effect from mid-August. Implementation was described as "very easy" by more than one contact, with box plants often eager to know the date and percentage increase so that they could promptly crystallise their own reaction. This seems to be especially true for those who did not recover the last paper price rise.
Box plant profitability has halved for many companies over the last year, albeit from what were often record highs. The same box plants today are shifting broadly the same volume but with a lower added value per square metre. The main reason for the unhappy change in fortunes is the failure to fully pass on (or mitigate using efficiencies) the circa 21% increase in containerboard costs (i.e. 23% for recycled liners and 15% for Kraft liner) since last Autumn. When one considers that box prices are typically based on a 55-60% material content, a 21% average uplift in paper costs is simply too big to absorb.
The now closed 240,000 tonne capacity at Townsend Hook represented some 15% of UK demand…and leaves SKG short on paper in the UK until its new lightweight paper machine is up and running in early 2015. The net result is that they have to increase sheet board and box prices this Autumn to an even greater degree than before. The rest of market is not immune to the same market forces…
This September, a typical 100,000 tonne sheet feeder finds itself facing additional annual paper costs of circa £7.6 million when compared to a year ago. A typical 50,000 tonne integrated box plant is staring down the barrel of an additional £3.6 million and a typical 10,000 tonne sheet plant will have to absorb an extra £720,000 of material cost.
Sheet board prices are set to rise from early September, with smaller suppliers having announced first on this occasion. Having wrongly judged that earlier paper price rises would not stick over the summer, some of the smaller sheet feeders have understandably used the opportunity to implement a cumulative price increase that includes a catch up for the missed Spring increase.
The big three sheet feeders (i.e. Board24, Abbey and Smurfit Kappa) seem to be treading gently in terms of implementation date and only asking for what they need. Having decided with a heavy heart to place sustainable margin before the expedience of cheap and cheerful volume, they have lost 7-10% market share to others who didn't put up prices earlier in the year. As reality catches up with everyone, the big three are likely to see some volume rebound as the playing field levels out. Box price increases are typically being implemented from mid-September and are likely to be largely settled by October. Similarly, the circa 70% of the high volume end of the market that has paper price indexation agreements in place will quietly move when EUWID and PPI should fully confirm recycled containerboard price increases in September.
I would urge the responsible corrugated Buyers out there to consider the viability of your corrugated supply chain when the inevitable discussion with your supplier comes; they need your help from an existential threat. I guess that you could shove your volume out to tender and hope that some hapless Sales Director drops his trousers and snaffles up your corrugated demand at an ultimately unsustainable rate.
However, with another paper price rise being contemplated for later this year, is it worth changing (and potentially exposing yourself to the attendant risks) for what may turn out to be a matter of weeks at the industry's busiest time of year? My advice is to work with your existing supplier and put the energy that could go into a fruitless tender into a value engineering exercise; take out cost from your supply chain rather than margin from your supplier.
