Whilst UK GDP growth stalled in the last quarter of 2012, we have a record high in the number of jobs and ultra-low interest rates…hence we're not witnessing the huge job losses and brutal levels of home repossessions that the aftermath of previous recessions inflicted. It really could be an awful, awful lot worse; Greece and Spain had many economic metrics in line with the UK just four years ago-but now find a quarter of their workforce unemployed. I suspect that our current situation is broadly as good as it gets at this stage of recovery from the worst financial crash in a lifetime.
Overall UK corrugated volume was the same in 2012 as the previous year in terms of area, although sheet feeding was up by circa 2%. However, the overall market used about 3% less weight…suggesting that the industry's huge investment in lightweight liner capability (i.e. in terms of paper mills and corrugators) is delivering the required performance for less grammage. The sheet feeder market showed a slightly lower underlying drop of 2% in weight:
Not surprising for a segment that has a high concentration of heavier, industrial goods to accommodate. There is also a greater loyalty to Kraft amongst sheet plant clients, who tend to be more conservative.
Across the market, it is fair to expect weights to continue to fall as new corrugators are introduced. All the same, the current uncertainty about medium term margin expectations in the sheet feeder market will probably have an understandably adverse impact on major investment decisions for some…why risk spending pound 8m buying and installing a decent new corrugator when a new entrant may be about to affect industry margins for a period?
Whilst the corrugated market can be safely described as lacklustre at the moment, there are notable pockets that are busy…the common theme for the better off being exposure to the retail sector, which has a greater resistance to the economic cycle than most markets.
However, despite indifferent volumes European recycled containerboard paper makers have been forced by epic losses at many paper mills to go out for a price rise of circa euro 60/tonne from the beginning of February. What started out as lonely announcements from Leydier in Southern Europe and Mondi in Eastern Europe became a continental chorus that was joined by market leaders Smurfit Kappa and DS Smith. Their cause will have been helped somewhat by notable downtime from Leydier and Palm in recent weeks. These price rises will largely offset price decreases over recent months…which suggests that box and sheet board prices will be largely unchanged as we approach the Spring.
Cepac are clearly on a roll, having now acquired two more businesses following their recent purchase of the former SCA Darlington business:
Screenprint Doncaster will help to keep added value within the group and introduce still more customers in this high margin sector. The Rawcliffe Bridge site from DS Smith, which has a big box capability and client base.
There are synergies in terms of cost and cross-selling to customers for Cepac to exploit. However, opportunities for others are drying up-consolidation in the UK market is entering the final stages for integrated box plants, with only a handful of options for those looking to buy or sell businesses.
The latter seem to be holding out for unrealistically high prices; it's worth remembering that you have to leave enough value in the business to make it worth buying. You only need to look at the example of SCA, who spent the thick end of pound 1 billion buying Reed Corrugated and Bowater to build a market leading presence in the UK. However, a couple of decades after entering the UK market they sold most of their box plants to SAICA for pound 100 million. That's a level of value destruction that should give everyone pause for thought (not least SCA shareholders!) before they bid for a box plant.
With Smurfit Kappa and DS Smith having a relatively high market share in the UK, their scope for acquiring box plants is limited by competition and overlap considerations. That leaves only two or three potential buyers for two or three reasonable-sized, high quality potential sellers. Rather like the end of a school disco…almost everyone else has paired up and there's the danger that you'll be left on the side-lines or – worse still – stuck with the ugly one. In the final analysis, something is only worth what someone is prepared and able to pay.
The January sales also saw competition deepen in the sheet feeding market, with examples of double digit price reductions from one of the big three leading to a closer alignment with the lowest cost supplier. This doesn't mean that the price at which sheet board is being purchased is falling per se…just that some buyers who only had one notably low cost supplier now have two. Hence subsequent deflation in box prices does not look like being triggered…all the more so as the floating anxiety of imminently rising paper prices sinks in and volumes begin to lift as we approach the Spring.
