Just when paper prices look like they’ve plateaued there is now a risk that they might go up, writes Raj Bhardwaj,

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:

So, how does 2022 look for the UK in broad terms and for box demand specifically?

The European Kraftliner market is tight and looks likely to remain so for at least the next couple of years:

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:

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: raj@knowitall.co.uk

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