Smurfit Kappa, Europe’s largest cardboard box manufacturer, has thrown down the gauntlet to industry rivals, warning that it will no longer help maintain paper prices by shutting its factories if others are opening new mills.
Speaking after the Dublin-based company reported it’s first interim results since its initial public offering in March, Gary McGann, chief executive, says the sector is seeing improved profitability.
But he adds: “People need to examine why. This is a unique situation on the cost side, with energy, chemicals, starches, recovered fibre costs all rising and yet people are getting pricing and getting returns. The reason? Because there is a reasonably disciplined supply demand balance out there.”
Historically, when paper prices rise, producers commission new plant adding to capacity, and ultimately depressing prices.
Mr McGann said Smurfit Kappa was “not going to be the sweeper-upper or lender of last resort for the industry” by closing its factories in order to keep supplies tight.
The company, created by the 2005 merger of Jefferson Smurfit and Kappa Industries, a Dutch rival, has together with SCA of Sweden taken the lead, with 2m tonnes of factory capacity, or slightly less than 10 per cent of European paper production, closed down since 2005. Smurfit Kappa has shut down 700,000 tonnes of capacity, representing about 14 per cent of its output.
The measures have allowed the industry to announce six successive paper price increases during that period, something not seen in years.
But since the IPO, three rivals – Mondi, which was recently spun out of Anglo American mining group, and two German companies Prowell and Hamburger, a privately owned German paper maker, and Hamburger – have revealed plans for new mills.
With demand for paper and packaging products expected to increase by 10.2 per cent between now and 2010, Mr McGann estimates there is room for an additional 1.7m tonnes of net new capacity in Europe.
“The industry does need new capacity but it needs to be managed in an orderly fashion. We will be a player but we will not be an underwriter of everybody else’s problem,” he says.
John Sheehan, analyst with NCB stockbrokers, says given the paper industry’s poor self-discipline in the past, investors remain hypersensitive about any announcements of capacity increases.
Smurfit Kappa has about a 24 per cent market share of the European paper market. It is an integrated producer, meaning it makes both paper and the finished corrugated product that makes up a cardboard box. It manufactures two paper products – the higher value kraftliner (or facing board, used on the outside of a box) made using wood chips, as well as the cheaper recycled containerboard product, which is made from old boxes and other waste paper products.
Kraftliner prices have been held back as US dollar-euro weakness has encouraged US producers to ship product to Europe, thus boosting supply.
But in containerboard making the Chinese mills have been buying up recovered fibre for their own paper production, pushing up input costs for Smurfit and other producers. Mr McGann says recycled paper costs went up €20 a tonne in June and a further €30 (£20) a tonne in July after the European Commission announced it planned to apply stricter rules on what could be exported, prompting the Chinese buyers to step up their purchases.
However, on the back of this, Smurfit has been able to announce two successive price increases this year, with another due next month. Box prices are also rising, although with a time lag.
“This industry is a growth industry,” says Mr McGann. “Demand growth is robust. It needs new capacity. But it needs an orderly introduction of new tonnage and that can happen only if people behave sensibly. But if everyone wants to be the new kid on the block, with the biggest, best and fastest, most modern machine, it will just be a mess.”