War Looks Like Prompting Box Price Inflation
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By Raj Bhardwaj
We’re witnessing a significant continent-wide easing in corrugated demand, which is down 20-50% (depending on your market) from the peak of quarter four. Despite this fall, European containerboard prices remained static in early February. So, why aren’t containerboard and box prices falling as they usually do at this time of year?
• Firstly, despite the 20-50% fall, paper demand is broadly in balance with supply. European stocks of recycled containerboard were 890,000 tonnes in week four of 2022, which was 7.8% up against the same point last year (when there was nowhere near enough paper around). Today, mills are successfully using a combination of exports (where higher prices are realised anyway) and much-needed maintenance downtime to avoid what might have been a mildly deflationary oversupply.
• The national living wage will rise 6.6% to £9.50 an hour from April.
• After 3.6 billion people worldwide were given lengthy stay-at-home orders by their respective governments over the last couple of years, hundreds of millions of employees have taken stock and decided to make meaningful change in their lives. A Microsoft survey found that 41% of global workers were considering giving notice in what social science types are calling the Great Resignation. Labour costs are likely to rise further-still as employers seek to win and retain unprecedented levels of talent that is on the move.
• With inflation now predicted to peak at 7% in April, lots of input costs are rising rather than falling.
Indeed, DS Smith have recently announced a €50/tonne recycled containerboard price rise to take effect across Europe, citing rising costs as the root cause. Thus far, their announcement does not seem to have translated into implementation of a price rise as none of their competitors have followed suit. Other paper makers, whose profits were up 88% in 2021, seem to have concluded that their metrics do not yet warrant a price rise. Thus, DS Smith have been alone in coming out of the trenches at this stage…I suspect that momentum will gather as volumes pick up in the Spring. In the meantime, DS Smith have drawn a line under paper price rise requests during the relative lull of February.
It has been worrying to witness the slow-motion train wreck that is Putin’s antagonism towards Ukraine. I’m reminded of a lesson delivered via the military genius of Bronn from Game of Thrones; there’s no cure for being a bad person (you have no idea how much my lawyer needed to paraphrase here before he stopped having palpitations). The democratic world’s leaders seem to have internalised this lesson. Whilst NATO countries will not join a shooting war, they have been galvanised into waging a meaningful economic war upon Russia. For the sake of millions of innocents, one has to pray that Russia quickly reassesses the cost-benefit analysis of their current course of action and withdraws their troops. I note some West Point wisdom at this point…everyone’s got a plan until they get punched in the face. The extent of the economic sanctions that the US, EU, Canada and the UK have agreed is far stronger than Russia will have possibly expected given the previous track record of hand wringing when Georgia and the Crimea were invaded. Western Europe’s new-found determination to support Ukraine and wean itself off Russian gas and oil will cost everyone in Europe rather a lot of money. The attendant rising energy costs are likely to stick for a while and difficulty in accessing Russian Kraft will probably increase your box prices even more.
Circling back to corrugated demand, why has it seemingly returned to pre-Covid levels? Heck, even the juggernaut that is e-commerce sector box demand has fallen off a cliff.
• The current market downturn was initiated by the global Omicron scare, which started in December and has turned out to be mercifully mild for most. If not home and dry, then much of the population (97% of which now has antibodies against the Covid) feels it is at least home and vigorously towelling itself.
• That and the Prime Minister’s self-inflicted political woes have led to an early easing of most Covid restrictions when compared to the rest of Europe. Tellingly, this seems to have led to a change in consumer behaviour, which is tilting back to the high street and away from peak online retailing. Hence, significantly fewer postal boxes are required. A population that goes out more, spends more on services and less on goods, which also reduces the number of boxes required.
In terms of corrugated demand, it feels like we’ve just got off a white-knuckle ride on a roller coaster and are now stranded on a ship without a breeze. A market situation that could be described as the ‘annual February dead spot’ has returned after a two-year pandemic-related absence. The practical upshot of precipitously falling demand is an overstocked corrugated supply chain, order cancellations and dramatically shortening lead times.
I reflected last week on two days in my working life over the last few months that perfectly juxtapose the changed market. As well as Editing the Know It All packaging newsletter, I’m a packaging consultant and sales agent for seven different packaging businesses – which keeps my finger on the pulse in terms of market developments:
• Late last summer, on a particularly fine Tuesday morning, I received a box order for circa £500,000 (a personal record after 30 years of selling) and another order from someone else at lunchtime for circa £1 million (breaking the aforementioned record after a whole 90 minutes). The factory in question already had a nine-week lead time and my 2021 budget was more than secure. Uniquely for the obsessed workaholic that I am, I called time on the working day and declared that a lasagne at my favourite Italian restaurant was called for. It was clear that no further boxes would be sold that day. The rest of the week didn’t see much proactive sales action either if I’m honest. I didn’t delude myself that I had suddenly acquired a sales Midas touch; it was an unearned shot in the arm arising from a market dysfunction. Putting myself on the bench was the responsible thing to do. My box plant would actually tell me off for winning any more work as we were in danger of being oversold; it was a sellers’ market.
• Conversely, last week I found myself in what felt like hand-to-hand combat with an evil competitor as we each sought to bag a precious order. Each of us quoted and counter quoted as the buyer played us off each other. My promised lead time of five working days made the difference; the proverbial kitchen sink was deployed and won the day. My steering wheel was slapped, there was whopping and no shortage of fist-pumping. The value of the order was £217.00. Then came a sober realisation that the next sale had to be bagged and I called the next person on my list.
The latter scenario is being played out thousands of times each week across our market, which is returning to what most of us would recognise as normality; a buyers’ market.
Competition has broken out as sales teams have been taken off the bench and asked to apply a full court press in the search for new business. Sales folk are having to once again strain every sinew to win work. Erstwhile keyboard warriors now have to actually go outside, blinking into the light and start knocking on doors again. Forgotten customers are being called, only to find that some have had the temerity to buy elsewhere. Sales meetings are being called and colleagues reacquainted. The notion of sales pipelines is being reintroduced. Phone bills and expense bills will up go for salespeople as actual proactive effort is expended.
Remember though…your competitors are allowed to compete too. Your customers are on their prospects list.
