European and American Carton Giants See Market Values Soar as COVID-19 Transforms the Global Carton Industry

Generally speaking, the packaging industry never suddenly speeds up, but the COVID-19 pandemic has clearly brought an incredible transformation to the carton industry, which holds an important position in the packaging sector.

Over the past 18 months, city lockdowns of varying degrees have forced millions of people to shift from offline consumption to online purchasing. This result has also brightened the prospects of the paper packaging industry, worth as much as $350 billion and at the core of the e-commerce economy. According to data from the consulting firm Smithers,

the amount of cardboard used to ship goods from retailers to households surged by nearly 40% last year.

Previously obscure carton packaging companies now have their shares chased by investors of all kinds. Since the stock market fell to a low in March 2020 due to the COVID-19 pandemic,

the share price of London-listed Smurfit Kappa Group has risen 84%, that of its rival Mondi has risen 58%, and the share price of New York-listed International Paper has also nearly doubled.

These three are heavyweights in the global corrugated packaging industry, and they also supply various linerboard, corrugated paper and other papers used to make corrugated board to the global paper packaging market. As more and more of daily life gradually becomes digital, seizing the pandemic-driven boom in carton delivery helps ease the brief and unavoidable decline in paper demand caused by the pandemic.

Oscar Lingqvist, an industry expert at the consulting firm McKinsey, said:

"The paper and packaging industry is undergoing its most significant transformation in decades, and the COVID-19 pandemic has given a positive boost to the industry's development."

As governments around the world resolve to permanently reopen their economies, the dilemma and challenge facing the industry is -

whether the shopping habits consumers developed during the COVID-19 pandemic can last.

Over the past six months,

the price of waste paper and other raw materials used to make cartons has jumped from an eight-year low of EUR 100 per tonne to EUR 160.

None of this has shaken the optimism of Tony Smurfit, chief executive of Smurfit Kappa Group, Europe's largest corrugated packaging company and a member of the London FTSE 100 Index. "Things look very positive. The pandemic has accelerated the development of e-commerce, and this trend will continue."

▲ Tony Smurfit, Chief Executive of Smurfit Kappa Group

In fact, executives at corrugated packaging giants say their biggest fear is not being able to keep up with demand. Sourcing linerboard, the paper used to make corrugated board, is a complex job. The world's packaging giants each procure in different ways. Mondi manufactures entirely from virgin fibre and recycled fibre, which is then used to produce finished cartons. UK company DS Smith, a London-listed FTSE 100 group, likewise buys large amounts of raw materials for its carton production.

"Market supply is very tight," said Andrew King, chief executive of Mondi, whose company's market value has jumped from GBP 7 billion to GBP 9 billion in the past 12 months. "Carton supply will be constrained at any time. We are about to sell out."

Due to higher costs, the operating profit of large European paper packaging groups fell by about a quarter on average in 2020, and it usually takes several months to pass on rising costs to retailers.

Investors enthusiastic about the industry's prospects say they are not counting solely on the pandemic to accelerate the industry's shift to e-commerce. The paper packaging industry is also seen as environmentally friendly, because consumer-facing companies are replacing plastic packaging with more sustainable alternatives.

Rebecca Maclean, investment director at Aberdeen Standard Investments, said companies are enjoying "a structural tailwind from e-commerce demand.

The industry is witnessing a shift in customer preferences and investment toward sustainable packaging solutions."

For example, in the UK, multinational consumer brands and supermarkets must honour their commitments to eliminate unnecessary or problematic single-use packaging as early as 2025. Suppliers are seeking a range of new paper packaging, such as six-pack beer rings or sausage packaging.

The world's largest cosmetics manufacturer, L'Oréal, will launch paper-based containers for its Kiehl's and La Roche-Posay brands this year.

The question for brand owners is:

whether consumers are willing to pay more for plastic alternatives

• because plastic is currently the cheapest?" said Justin Jordan, an analyst at Exane BNP Paribas, "

If my product uses more sustainable packaging, will I gain more market share?"

Miles Roberts, chief executive of DS Smith, said the company recently signed a six-year contract with a consumer goods group to jointly develop new packaging. He believes large packaging companies will continue to prosper and grow as retailers and consumer goods groups seek scale suppliers whose packaging can adapt to the needs of different markets.

"Our customers want to work with large companies and operate across multiple regions," he said.

As a result, a growing number of people believe the industry must now achieve innovation and development through consolidation. It is reported that Mondi explored a takeover of DS Smith earlier this year.

Europe's paper packaging market remains more fragmented than North America's. In the US, the top six companies, including International Paper and WestRock, control about 80% of the market. Thomas Rands, an analyst at Investec, said US companies may choose to target European groups to secure the international reach that multinational customers want. "I don't think European companies are big enough to influence the US market, but the US market needs the kind of innovative mindset that European companies have."

If greater production and corporate scale are needed, then M&A will encounter enormous obstacles in an industry where sporadic consolidation attempts quickly fail. Smurfit Kappa rejected a takeover offer from International Paper, the world's largest pulp and paper company, in 2018, calling it "opportunistic". Memphis-based International Paper told the Financial Times that it is now focused on acquiring smaller rivals in North America and Europe.

——This article is reprinted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-378038.html