Friday, October 22, 2021

Pandemic delivers transformation for the packaging industry

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The packaging industry will never beat a pulse, but the pandemic has caused an unlikely transformation in the state of its most well-known product: the humble cardboard box.

With blackouts that forced millions to go online for almost everything over the past 18 months, the daily arrival of packages has provided many with a rare shiver of excitement in a world devoid of shops, restaurants, cinemas and travel.

The unlikely outcome has also cheered the fate of the $ 350 billion paper packaging industry at the heart of the e-commerce economy. The volume of cardboard used to deliver products from retailers to homes last year increased nearly 40 percent, according to consultancy Smithers.

Packaging companies that were not known before are now must-haves. Since equity markets hit their lowest point from the pandemic in March 2020, shares of London-listed Smurfit Kappa have risen 84%, rival Mondi’s have gained 58% and shares of International Paper, which is listed in New York, has nearly doubled.

All three are among the heavyweights of a globally fragmented industry that also supplies the world with paper. Riding the pandemic-fueled delivery boom has helped cushion the inexorable decline in demand for paper as more of daily life is digitized.

“The industry is undergoing the most substantial transformation it has seen in many decades,” said Oskar Lingqvist, industry specialist at consulting firm McKinsey. “Through Covid, it has been catapulted forward.”

With governments around the world determined to reopen economies for good, the dilemma facing the industry is whether the purchasing habits learned during the coronavirus crisis will endure.

Rising prices for carton, which packaging companies are passing on to retailers, heightens the risk that some of last year’s explosive growth will be curtailed. Over the past six months, prices for cardboard that is recycled in new boxes jumped from an eight-year low of about € 100 per tonne to € 160.

None of that detracts from the optimism of Tony Smurfit, CEO of Smurfit Kappa, Europe’s largest corrugated packaging company and a member of London’s FTSE 100 index.

“The trends are looking incredibly positive,” Smurfit told the Financial Times. “The pandemic has accelerated the trend of electronic commerce. That is not coming back. “

Tony smurfit
Tony Smurfit, CEO of Smurfit Kappa: ‘The pandemic has accelerated the trend of e-commerce. That’s not coming back ‘© Simon Dawson / Bloomberg

In fact, executives say their biggest fear is not keeping up with demand. Sourcing container board, the heavy sheets that are layered to make corrugated board, as board is known in the industry, is complex and the world’s largest packaging companies do it in different ways.

Mondi makes all of its own from virgin and recycled fibers, which it then uses to produce finished boxes. DS Smith, a London-listed FTSE 100 group, buys a significant amount of raw material for its boxes.

“The markets are very tight,” said Andrew King, Mondi’s chief executive, whose market capitalization has risen from £ 7bn to £ 9bn in the past 12 months. “The supply of boxes is limited at any time. We are selling out immediately. “

Mondi's plans in Swiecie, Poland
Mondi’s plans in Swiecie, Poland © Mondi

Despite the danger that customers will resist, charging higher prices is a welcome stimulus for packaging companies whose profits have lagged their electrifying stock performance over the past 12 months.

Operating profit at Europe’s large paper packaging groups fell by around a quarter on average in 2020 due to higher costs, which typically take months to transfer to retailers.

Investors excited about the industry outlook say they are not simply betting that the pandemic will accelerate the shift to e-commerce. The sector is also seen as a natural winner, as consumer-oriented companies replace plastic packaging with more sustainable alternatives.

Companies are enjoying “the structural tailwinds of e-commerce demand,” said Rebecca Maclean, chief investment officer at Aberdeen Standard Investments. “The sector is experiencing a shift in customer preferences and investments towards sustainable packaging solutions.”

In the UK, for example, multinational consumer brands and supermarkets must deliver on their promises to eliminate unnecessary or problematic single-use packaging by 2025.

Vendors are conjuring up a number of new paper-based packaging, such as six-pack beer rings or sausage packs, to help them. L’Oréal, the world’s largest cosmetics maker, is launching paper packaging under its Kiehl’s and La Roche-Posay brands this year.

“The question for brand owners is: Will consumers be willing to pay more for a plastic alternative because plastic is the cheapest available today?” said Justin Jordan, an analyst at Exane BNP Paribas. “Will I gain share by having my product in a more sustainable packaging?”

Global packaging market

Miles Roberts, CEO of DS Smith, said the company had recently signed a six-year contract with a consumer goods group, much longer than the standard six to 12 months, to help develop new packaging. .

Larger packaging companies will prosper, he argued, as retailers and consumer goods groups seek suppliers with the scale to produce identical and more complex packaging in different markets.

“Our clients want to work with large companies and work in multiple geographies,” he said.

That’s why speculation is growing that an industry without truly global players will now have to create them through consolidation. Mondi was reported to have explored the acquisition of DS Smith earlier this year.

The European market for paper packaging remains much more fragmented than that of North America, where the top six companies, including International Paper and WestRock, control approximately 80% of the market.

US companies could choose to target European groups to ensure the international reach that multinational clients want, said Thomas Rands, an analyst at Investec. “I don’t think the Europeans are big enough to attack the United States,” he said. “The US market wants innovation from European companies.”

If larger scale is desired, there are obstacles to achieving it in an industry where sporadic attempts at consolidation have quickly failed.

Smurfit Kappa in 2018 rejected an acquisition approach from International Paper, the world’s largest pulp and paper company, calling it “opportunistic.” Memphis-based International Paper told the FT that it was now focused on seizing smaller rivals in North America and Europe.

Explaining the still fragmented nature of European industry, Smurfit’s chief executive said it wasn’t just about the money. “There are many large family businesses that believe in dynastic situations,” he said. They “feel comfortable in their skin and want to stay there.”

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