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Raj Bhardwaj | UK corrugated supply chain utterly overwhelmed

If you tried to buy extra containerboard, sheet board or boxes for supply in December – you couldn’t access them for love nor money. Seriously – even the likes of Amazon are said to have been unable to buy enough boxes and were turned down by sizeable alternative international suppliers who were understandably reserving precious and suddenly insufficient capacity for long-standing customers.

In early December some box plants were quoting lead times into March 2021 and filling up fast regardless. Paper makers and sheet board suppliers are deploying harsh rationing to long-standing clients and even members of their own groups. What on earth has happened to bring us to this hitherto unprecedented state of affairs?

An awful lot has changed in the European corrugated market since the summer. In July containerboard stocks were up 16% on the previous year and demand across Europe was significantly down thanks to a pandemic that had seen populations locked down by government decree for much of the year to date. Notable new containerboard capacity was coming on stream and free-falling deflation duly ensued, with three price reductions taking effect on the continent.

With different dynamics afoot in the UK, we witnessed only modest deflation on this side of the Channel. With a view to bringing the market closer to balance in terms of supply and demand, European paper mills brought forward their usual quarter one plant shutdowns and others aggressively exported to China. Quite rightly there was an absence of co-ordination between competitors on the combined amount of capacity that was temporarily closed or exported…however the net effect was a drastic overcorrection in the supply-demand balance.

In turn, we have gone from feast to famine in terms of supply of containerboard. However, not only has paper availability decreased markedly from its potential output, but a handful of factors have combined to increase demand for boxes to hitherto unseen levels and worryingly widen the gap between supply and demand:

  • In the first instance, we saw the usual increase in demand in the approach to Christmas. UK seasonal demand in quarter four is typically 25% higher than the trough of quarter one. Happens every year; fair enough.
  • If that perennial challenge was not enough, Covid-19 has dramatically accelerated changing buying habits and doubled the share of retail sales that are online to 30%. It takes far more board area to wrap around a single product by post than a multi-pack delivered to a traditional retailer. The practical upshot is a significant increase in the amount of board and hence paper required to meet the changed market needs for boxes. This is a fundamental uplift in the amount of corrugated that will be needed to meet ongoing demand. long after Covid-19 becomes a distant memory.
  • There was a fair degree of stockpiling by some manufacturers and retailers ahead of a then uncertain Brexit (in terms of a trade deal) at the end of the year.
  • Paper supplies are proving to be ubiquitously fitful; no one is immune. Suppliers were often cutting orders by 50% with little or no notice or even cancelling them altogether; even large corporates were behaving like this within their own groups. For the first time in my three decades in our industry, box plants and sheet feeders were commonly running out of paper and unable to keep up with demand. To be clear, significant demand was not met and many folks went without boxes.

To put the above scenario in context, it is useful to consider the recent investment by Prowell in a greenfield sheet feeder site, which added circa 20% of new sheet board capacity to the UK (i.e. a 300 million square metre net increase in capacity in a 1.5 billion square metre sheet feeding market). As the national corrugated market typically grows by 2% in a good year, the addition of 20% capacity could reasonably be expected to take a long, long time to be utilised to its potential.

However, they were actually full and turning away orders. Indeed, the quarter four UK corrugated supply chain could best be described as utterly overwhelmed. The normal 72-hour lead time from sheet board suppliers became 3-8 weeks and varyingly unreliable everywhere. Some sheet feeders refused to take any orders at all for 1-2 weeks recently, as they sought to catch up on their growing backlog. All extended their lead times in a bid to reduce demand but found that clients continued to order more anyway and often didn’t want to pay any attention to the lead time whilst pleading special circumstances for lumpy opportunities / emergencies.

The New Year has witnessed a crystallising of a paper price rise of at least £40/tonne (Kraft and recycled liners). If this seems fanciful, it is worth noting that some buyers are paying £70-160/tonne over autumn’s paper prices (depending on whether they were previously enjoying an ultimately unsustainable spot price) to secure containerboard supply in January. For some, February’s prices are higher-still.

Thus, a general price rise for sheet board seems to be underway. There may well be two by the time the spring is upon us.

The subsequent price rise implementation programme will be a complex and messy consideration. Do you go for one price rise or wait to see if there will indeed be two? Circa 50-60% of all corrugated volume is on a paper-rise related indexation agreement and will simply change using the prevailing formula at the next monthly or quarterly review. UK material costs fell somewhat last year…if you passed this on, an increase will be a logical if unwelcome request. If you didn’t pass this on, there is an argument for keeping your head down and taking this increase on the chin. Whatever you’re minded to do, more tenders will be generated by Buyers seeking to verify and mitigate your rising cost base. Corrugated volume will continue to migrate to the lowest cost producers.

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: raj@knowitall.co.uk

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