The Corrugated Market Today

Following price increases in late 2009, the price of a cardboard box rose to the level it was in 1995. So after fifteen years, the net effect has been zero movement in price. This is measured against retail price inflation during the same time frame of 50%. (This is an average of around 2.7% per annum, which is relatively low). So in reality, the price of a box today is 50% lower than it would have been if box prices had remained in line with all other goods.

How has this happened? Well, the reality in any market is that prices are not set by costs, they are set by supply and demand. As the corrugated market in the UK has suffered from chronic over supply for a prolonged period, the price of a box has been far less than its cost for a significant period of time. This is unavoidable; it is just basic supply/demand economics. There is always optimism in the market that growth will occur and drive demand up, but the recession removed any optimism that existed in the past.

Of course, the big integrated groups have taken the losses in different parts of the corrugated supply chain at different times. So there have been occasions when the box companies have been profitable, but the paper companies have been losing money. At other times the corrugated paper makers have been profitable, but all of the box companies have lost money. Over recent years leading up to end 2009, it has been the paper companies who have borne the brunt of the losses. Throughout the first half of last year, the biggest corrugated paper producer in the UK was losing £2 million per month. Of course for the big public companies which dominate the market, the effects of these losses are only felt by the shareholders. For the independents of course, they can mean cessation of business, as sustained loss making cannot be survived.

Over the long term, shareholders will not tolerate continued loss making, so the supply/demand imbalance has to be addressed, and eventually prices will have to move back to a point where the selling price is greater than the total cost. This occurs either through rationalisation, where the bigger companies merge and take out capacity, or through failure, where companies just go bust. Looking at the corrugated market today, both of these events will happen, and we will see both rationalisation and failures during this year of 2010.

Paper

Following two price rises in 2009, the corrugated paper makers moved back into the black during first qtr of 2010, and prices moved above costs for the first time in a long while. Papermaking in the UK was roughly in balance from a supply/demand perspective during late 2009 early 2010 but has now slipped so that there is a tightening of supply of paper which has driven up prices further.

The Corrugated Market

In the normal course of events in this marketplace, the increased price of paper would move loss making into the box plants, where over-capacity would prevent these increases being fully recovered. This will however change in 2010, because as was said, the inevitable balancing mechanisms of over-supply, which are closure and rationalisation, have already begun. So Check the financial robustness of your current supplier.

What will happen now?

There is absolutely no doubt that there will be significant rises in the price of corrugated products during 2010. Whilst it seems unlikely that we will see prices recover to where they should be, that is increasing by 50%, it is our view that prices will probably increase by 22%+ by the end of 2010 as compared with Mid 2009 prices. Despite this, corrugated will remain by far the most cost-effective form of transit packaging, and will still be, if anything, too cheap. As yet of course, the timing is unknown. One thing that has to be avoided is the quoting of firm prices for any period longer than three months, because these will become unsustainable.....end.

Historic updates

Winter 2009 

Certainly since our last correspondence the paper suppliers have been more bullish about their need to recoup margin after the heavy losses earlier in 2009. This has meant that both recent large paper price rises have been implemented, taking effect in September and October 2009. These have filtered through to board and box prices for October – December 2009. Our industry is being warned of further raw material increases to come in 2010. The likelihood of that depends to a degree on demand in the first quarter of 2010, but clearly from what indications we are currently getting with a Major sheet feeder having gone bust early in January raw material suppliers will be in a stronger position that ever to force more increases through. We on our part, understand the need to everyone to ‘make money’ not only to survive but also so that they can invest to go forward. However, whilst the economy remains fragile, forcing through ‘several increases’ in 2010 that with some commentators will be seen as 'unwarranted' will only filter through to higher inflation and repercussions later.

Autumn 2009

It is looking very much as though the bottom of the price cycle has been reached as both European and UK producers of container papers have announced significant increases for their products, to take effect during September. Corrugated case making paper consumption is on target for being 8-11% down on 2008 figures. However, with a rationalisation of supply as approx 18% of UK paper mill production closed/ceased during the first half of 2009, there is now a supply/demand balance that swings back in favour of the paper mills. Any paper price increase may lead to a review of box and sheet board selling prices, probably during October & November.

The future of Corrugated
Corrugated has a great advantage over other packaging mediums as it comes from a renewable source – wood. It is one of the best examples for sustainability, the perfect loop; because theoretically all corrugated board can be recycled and turned back into paper. You lose some of the fibres during the process of paper recycling because they become shorter, and they eventually enter the environment as a natural biodegradable material. Across Europe as a whole corrugated has 82% going back into paper production.