At the peak of Covid restrictions, 3.6 billion people worldwide were subject to mandatory stay-at-home orders. The economic rebound from that unprecedented collective government action is set to continue. Global GDP growth is forecast at 4% in 2022 by the Centre for Economics and Business research (compared to 5.1% in 2021), against the headwinds of the Omicron variant, burgeoning inflation, and the supply chain crisis.
The UK economy continued to run hot late last year, according to the latest figures available:
- The number of job vacancies rose to a new record 1,219,000 in September to November 2021.
- There are 424,000 more U.K. jobs than the pre-Covid February 2020 level.
- Inflation in the year to November 2021 was running at 5.1%.
- The government was doing its bit to support the economy through the pandemic, with borrowing in the financial year ending March 2021 reaching a level last seen at the end of World War Two.
So, how does 2022 look for the UK in broad terms and for box demand specifically?
- Whilst the Omicron variant spooked much of the world from early December, this strain of Covid seems to be milder than previous incarnations. Early studies show Omicron to be 70% less likely to lead to hospitalisation. You are 60 times more likely to end up in intensive care if you haven’t been vaccinated. Health gurus advise that we are likely to be struck by waves of new Covid variants until at least 70% of the world’s population has been vaccinated; this should be achieved by the end of 2022. British stats show the population’s resilience growing. We now have 93% of people with antibodies to Covid and with each exposure, the body becomes better at fighting it off. Together with improved medication, this has helped the British fatality rate to drop by 90% over the last year. So, it looks like the economy will not be hit as hard by Omicron as we feared just a month ago.
- K. growth is forecast at 4% for 2022, although the Spring will see about £1,000 of additional cost per household when higher national insurance and energy prices begin to hit hard. In April Ofgem lifts its price cap on household gas and electricity bills. The energy industry has warned that domestic prices could rise by as much as 50%. The Bank of England forecast inflation will peak at 6% in April.
- The received wisdom in the city is that interest rates will be raised gradually between February and late summer to 1% with a view to taming inflation. Real incomes are set to fall by 1.7% in 2022 and not move into positive territory until early 2023 according to HSBC.
- With a record number of vacancies, unemployment is forecast to remain low in 2022; falling to 4% and circa 1.4 million unemployed early in the year.
- K. box plant lead times remain extended compared to what one would normally expect in quarter one. In years gone by, February would typically see box plant lead times of 4-5 days. However, today finds many box plants with lead times into late February and March. eCommerce has driven much of this volume. There were five billion parcel shipments in the U.K. in 2020, a 33% increase according to the Pitney Bowes Parcel Shipping Index. That’s 74 boxes per person. The push to minimise plastic packaging has also driven significant volume to corrugated. Together, eCommerce and anti-plastic sentiment look like giving corrugated another good year of demand.
The European Kraftliner market is tight and looks likely to remain so for at least the next couple of years:
- 2021 saw the introduction of no meaningful new Kraftliner capacity and 2022 will only see an additional 150,000 tonnes come on stream (100,000 tonnes by The Navigator in Portugal and 50,000 tonnes by Stora Enso in Finland).
- Looking further ahead, 2023 will see 315,000 tonnes of additional capacity (275,000 extra tonnes from SCA in Sweden and 50,000 tonnes from Stora Enso in Finland).
Hence, it was no surprise to see UK Kraftliner prices rise by £50/tonne in December and another £10/tonne for some in January. It remains incredibly hard to secure Kraftliner tonnage above your previous year’s usage.
The situation for recycled containerboard (RCCM) is different. Demand remains reasonably buoyant; some paper mills are oversold but European stocks were 693,000 tonnes just before Christmas – which was up 12% compared to the same week in 2020. Overall, there’s a touch more RCCM being produced than there is demand for it, but there’s no immediate prospect of falling prices. Should demand taper off notably because of Omicron or other adverse factors, there is scope for paper mills to start exporting in earnest again and maintain the supply-demand balance. In the meantime, paper producers have tried to run as little maintenance downtime as possible in a bid to maintain service levels and have a semblance of a buffer for rumbling logistics issues. It’s interesting to consider when additional European RCCM capacity has come / will come to market:
- 2021 saw the introduction of one million tonnes of additional recycled containerboard capacity (280,000 tonnes net increase by Palm in Germany and 720,000 tonnes by Kipas in Turkey.
- 2022 will see 865,000 tonnes of new European recycled containerboard capacity (205,000 tonnes by Papresa in Spain, 450,000 tonnes by VPK in France and 210,000 tonnes by Stora Enso in Finland). This should arrest further supply-led recycled paper price increases and be manageable by containerboard mills using exports as a safety valve to avoid what they would see as worrying, nascent overcapacity.
- 305 million tonnes of new recycled containerboard capacity is scheduled to come on stream in 2023…at which point significant RCCM price deflation is likely unless there is rationalisation of the least productive capacity and serious exporting.
- 36 million tonnes of additional recycled containerboard capacity is slated to go live in 2024.
In isolation, one could reasonably hope that the RCCM market has peaked in terms of price and sigh in mournful relief at the prospect of gentle deflation over the coming year. However, energy prices have risen by 400% in Europe (6-700% in Germany) and have prompted a handful of paper makers to apply an energy surcharge in the £100-200/tonne range. I remember looking at a paper mill cost chart over a decade ago and noting that energy represented 25% of the cost of production. To be fair, many machines are much more efficient now and the price of paper has more than doubled since then. Suffice to say, that energy is a significant cost to a paper mill (it’s formally classed as a high energy usage industry) and a 400% cost increase would seem to be an existential threat to lots of senior management jobs if not passed on to customers.
So, after a year of rampant paper industry price inflation, what’s stopping everyone else from applying a huge price rise? After all, they’ve had lots of practice and do not seem short of courage or conviction. A big part of the reason would seem to be hedging…many of the major containerboard makers fixed their energy prices and have thus far avoided the aforementioned 400% increase. In a nutshell, the likes of DS Smith have hedged wisely and don’t need an energy-related price surcharge just yet. So, who has not hedged on energy costs and is hurting badly? As Warren Buffet famously said, when the tide goes out you can see who’s been swimming naked. Last year saw containerboard price rise increments of circa £50/tonne; each prompting box price rises of circa 8%. If high energy costs are sustained (which looks likely), it seems reasonable to expect a spike of 15-20% in box prices once a critical mass of collective paper makers’ hedging lapses. If that seems unthinkable, remember that box prices rose by 38-45% in 2021. I’ll keep my ear to the ground and report back soon.
Raj Bhardwaj is Editor of the Know It All newsletter and also runs a software and consultancy business with a focus on the packaging sector. You can contact him via e-mail: [email protected]
