The pandemic brings transformation for the packaging industry

The packaging industry will never step up the pulse, but the pandemic has caused an unlikely transformation in the status of its best-known product: the humble cardboard box.

With lockdowns forcing millions of people to log in for almost everything over the past 18 months, the daily arrival of parcels has provided many with a rare thrill of excitement in a world stripped of shops, restaurants, cinemas and more. of travel.

The unlikely outcome also brightened the fortunes of the $ 350 billion paper-based packaging industry at the heart of the e-commerce economy. The volume of cardboard used to deliver merchandise from retailers to households last year increased by nearly 40%, according to consulting firm Smithers.

Previously unknown packaging companies are now essential stocks. Since stock markets hit their lowest for the pandemic in March 2020, shares of London-listed Smurfit Kappa have risen 84%, those of rival Mondi have gained 58%, and shares of International Paper. , listed in New York, nearly doubled.

All three are heavyweights in a globally fragmented industry that also supplies the world with paper. Profiting from the pandemic-fueled delivery boom has helped cushion it against the inexorable decline in demand for paper as everyday life is digitized.

“The industry is going through the most substantial transformation it has seen in many decades,” said Oskar Lingqvist, industry specialist at consultancy McKinsey. “Thanks to Covid, he was catapulted forward. ”

As governments around the world are determined to reopen economies for good, the dilemma facing the industry is whether the buying habits acquired during the coronavirus crisis will continue.

Rising carton prices, which packaging companies pass on to retailers, increases the risk that some of the explosive growth of the past year may unwind. In the past six months, prices for recycled cardboard in new boxes have fallen from an eight-year low of around € 100 per tonne to € 160.

None of this shakes 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 look incredibly positive,” Smurfit told the Financial Times. “The pandemic has accelerated the trend of electronic commerce. It is not going back.

Indeed, executives say their greatest fear is not keeping pace with demand. The sourcing of containerboard, the heavy sheets that are layered on top of each other to make corrugated cardboard, like cardboard is known in the industry, is complex and the world’s largest packaging companies do it in different ways.

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

“The markets are very tight,” said Andrew King, managing director of Mondi, whose market capitalization has grown from £ 7bn to £ 9bn in the past 12 months. “The supply of boxes is limited at all times. We sell immediately.

Despite the danger of customers balking, charging higher prices is a welcome boost for packaging companies whose profits have lagged behind the electrifying performance of their stocks over the past 12 months.

The operating profit of large European paper-based packaging groups fell by around a quarter on average in 2020 due to higher costs, which typically take months to trickle down to retailers.

Investors excited about the industry’s outlook say they’re not just banking on the pandemic to speed 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 benefiting from “structural favorable winds in e-commerce demand,” said Rebecca Maclean, chief investment officer at Aberdeen Standard Investments. “The industry is witnessing a shift in customer preferences and investments towards sustainable packaging solutions.

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

Suppliers cite a flood of new paper-based packaging, such as beer rings or sausage packets, to help them. L’Oréal, the world’s largest cosmetics manufacturer, is launching paper-based containers this year under its Kiehl’s and La Roche-Posay brands.

“The question for brand owners is, will consumers be willing to pay more for an alternative to plastic because plastic is the cheapest on the market? »Declared Justin Jordan, analyst at Exane BNP Paribas. “Will I gain share by having my product in more sustainable packaging? “

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

Large packaging companies will thrive, he argued, as retailers and consumer goods groups seek suppliers on the scale needed 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.

This is why speculation is growing that an industry without truly global players will now have to create them through consolidation. Mondi is said to have explored a takeover of DS Smith earlier this year.

The European paper-based packaging market remains much more fragmented than that of North America, where the six largest companies, including International Paper and WestRock, control around 80 percent of the market.

US companies may choose to target European groups to ensure the international reach desired by multinational clients, said Thomas Rands, analyst at Investec. “I don’t think the European guys will be big enough to attack America,” he said. “The American market wants innovation from European companies.

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

Smurfit Kappa in 2018 rejected an approach to take over International Paper, the world’s largest pulp and paper company, calling it “opportunistic.” Memphis-based International Paper told the FT it was now focusing on winning over smaller rivals in North America and Europe.

Explaining the still fragmented nature of European industry, the CEO of Smurfit said it’s not just about money. “There are a lot of big family businesses that believe in dynastic situations,” he said. They “feel good about themselves and want to stay there”.