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Corrocarton packaging market: challenges and answers

29 OCT, 2020

Topic: Corrugated packaging market report, Russian market

 

This article is, in a sense, a continuation of the material accompanying the review of the Russian market of MS-5B waste paper, cardboard packaging, corrugated cardboard packaging for 2019

 

 

Dmitry Dulkin

CEO, DF,

Ph.D.

The article examines the dynamics of these markets in 2019 and the first half of 2020, identifies the main trends and draws conclusions about the near-term prospects of the markets in connection with the latest developments in the economy and society.

Last year for the industry of packaging from corrugated cardboard, as well as related industries - the production of cardboard, waste paper - was the year of the beginning of the industry crisis.

The most obvious sign of the coming problems was a slowdown in growth.

According to the CBP Information and Analysis Agency, the Center for Systems Solutions (here and beyond, if no other information is stated, the production of corrugated cardboard packaging last year increased to 6,745 million sq m compared to 6,532 million sq m a year earlier.

The growth rate for the year was 3.4 per cent, the lowest in the previous four years.

The slowdown is linked to the filling of market niches created by the country's import substitution policy. In the largest market segments, goods that were previously supplied from abroad have already been replaced by Russian manufacturers.

Opportunities for domestic consumption growth are limited due to a decline in household incomes: real cash incomes have started a slow recovery in 2018, but according to Rosstatdata, 2019 is still below 2014.

The soft factors of market growth in the short- and perhaps medium-term perspective can only support the market, but not ensure its outpacing growth.

Figure 1. Dynamics of the release of packaging from corrugated cardboard in 2015-2019, million sq m, and market dynamics factors

Source: Center for Systems Solutions

According to the results of the first half of this year, Rosstat recorded an increase in the production of corrugated cardboard boxes by 4.9% compared to the same period last year.

The reasons for such a marked increase in output in the industry against the background of the general decline in business activity associated with the restrictive measures are discussed below.

At the same time, the past year, as well as the previous year, was characterized by the active introduction of packaging facilities.

During the year, production capacity increased by 545 million sq m per year, close to the mark of 10 billion sq m per year: at the end of the year they were estimated at 9,915 million sq m per year, compared with 9,370 million sq m per year on January 1, 2019.

Accordingly, the loading capacity for packaging production decreased to 68.0% compared to 69.7% in 2018.

As of the beginning of 2020, the implementation of new construction and modernization of packaging capacity in the amount of 1,343 million sq m by the end of 2021 was confirmed.

At the end of 2019, at the meeting of the expert council of the National Packers Confederation, forecasts of growth of the corrugated packaging market were announced: for the period up to 2021, industry experts indicated a projected growth rate of 3.3-3.5% per year. That is, by 2021 the projected volume of packaging production was to reach 7.2 billion sq m per year.

Thus, in the implementation of confirmed projects, the level of capacity utilization by the end of 2021 would decrease to 64%.

 

The first thing that frankly catches the eye is the launch of two-meter BDMs, with the most typical width of the corrugated unit - 2500 mm

The looming oversupply and reduced capacity utilization have reduced the price of corrugated corrugated cardboard packaging. The change in the price trend occurred in the middle of the 2nd quarter of last year: in May, the price reached the maximum value for the entire period of observations and amounted to 24.59 rubles/sq m (here and then prices are excluding VAT).

By the end of the year, the price of a box of corrugated cardboard decreased to 20.95 rubles/sq m or 14.8% compared to the noted maximum.

An important factor in the decline in the prices of corrugated cardboard products was the cheapening of cardboard. Maximum prices for raw materials for the production of corrugated cardboard were fixed at the turn of 2018-2019: the price for craftliner reached 48 956 rubles/t, for recycled paper cardboard - 39 327 rubles/t.

By the end of 2019, commodity prices fell to 35,355 rubles/t (by 27.8%) and 22,652 rubles/t (up 42.4%) Accordingly.

The following factors contributed to the cheapening of the cardboard.

Just as in the packaging segment, the manufacturers of cardboard during 2019 carried out a significant introduction of production capacity: projects with a total capacity of 685 thousand tons were implemented year-on-year, including the production of pulp cardboard - 237,000 tons, paper cardboard - 448 thousand tons.

The commissioning of such large production facilities led to a turnaround of the uptrend of the price of cardboard: price growth with minor corrections continued since the beginning of 2015, accelerating sharply in the end of the 1st quarter of 2018.

Figure 2. Dynamics of prices for cardboard, ruble/t without VAT

 

Source: Center for Systems Solutions

Minimum values for the price of cardboard reached by the beginning - the middle of the 2nd quarter of this year. The main factor in the increase in the price of cardboard was the rise in the price of waste paper for reasons outlined below.

Figure 3. The introduction of cap-and-plate production capacity and forecast

until 2022, thousands of tons per year

Source: Center for Systems Solutions

The new capacity in the period 2020-2022 will put additional pressure on the prices of cardboard. In a significant part, new projects do not meet modern requirements for technology.

The first thing that frankly catches the eye is the launch of two-meter BDMs, with the most typical width of the corrugated unit 2500 mm. In fact, packaging manufacturers are offered to give up 20% of capacity.

Second - BDM with one moulding mesh are demanding to raw, but can not provide quality characteristics of cardboard, meeting modern requirements.

Lower tar prices have also contributed to cheaper cardboard, but were mainly due to political factors. On December 29, 2018, the Russian government adopted resolution No. 1716-83, which imposed a ban on the import of paper and cardboard from the territory of Ukraine.

The Russian market was the main export destination of Ukrainian paper products and at the same time - the main source of external supplies of raw materials. It can be said that Russian waste paper was processed at Ukrainian enterprises and returned to Russia in the form of finished products.

Figure 4. Price of WASTE of MS-5B brand in 2017-2019, ruble/t without VAT with delivery

 

 

Source: Center for Systems Solutions

The cheapening of waste paper continued until the end of the 1st quarter of 2020.

In more detail, the dynamics of the waste paper market during the period of restrictive measures are discussed below.

The EU market indicators had an additional impact on the prices of cardboard and waste paper on the Russian market. Over the past year, there has been a steady decline in the prices of pulp and paper products and waste paper.

Figure 5. Dynamics of prices for cardboard and waste paper OCC in the EU, euro/t

 

 

Source: FOEX

As you can see, the EU market in the end of the 1st - early 2nd quarter of 2020 also observed a change in price trends. Restrictive measures led to an increase in the price of waste paper, which in turn caused an increase in the price of recycled paper and provided support for the prices of craft liners.

However, by the time this article was published, the prices of recycled paper and cardboard on the European market again show a decline.

Thus, during 2019, the industry began to develop a classic crisis of overproduction, due to the existing overcapacity in recent years against the background of limited growth in demand.

At the end of the first quarter, the industry crisis was caused by a general economic crisis caused by the fall in oil prices, the devaluation of the ruble against reserve currencies, as well as the pandemic of coronavirus, which led to severe restrictive measures, which, in turn, significantly reduced business activity.

New circumstances inevitably lead to a correction of forecasts, including in the packaging industry.

The decline in business activity inevitably leads to a fall in the main macroeconomic indicators. Experts differ only in the estimates of the depth of the fall of the Russian economy: at the initial stage of the crisis, the most pessimistic forecasts gave a decline in Russian GDP by more than 10% and attribute the start of the recovery to the 2nd quarter of 2022.

Figure 6. Expert forecasts of Russia's GDP dynamics in 2020, % by 2019

Source: Organizations' own forecasts

Adjusted at the end of August this year, the forecast gives an estimate of a decline in Russia's GDP by 3.9% at the end of this year. The Russian economy will return to pre-crisis levels in the third quarter of 2021, and gdp growth is estimated at 3.4% in 2022.

Although, as the examples of the crises of 2008-2009 and 2014-2015 have shown, the gdp dynamics as a whole have very little impact on the packaging industry, the most interesting in the current crisis is the structure of changes in GDP.

Experts at McKinsey and Co. point out that consumption and investment will be the most negative impact. The level of consumption, depending on the development of the overall economic situation, may decrease by 4.9-10.5% compared to 2019, the forecast of investment decline is 2.1-3.9%.

Consumption dynamics should also be considered in the structure. The data on consumer spending dynamics provided by the Sberdata Laboratory, Sberbank's big data processing and analysis initiative, is of particular interest here.

Figure 7. Change in demand for goods (estimate of retail turnover dynamics) and services in March-April 2020, % to comparable week of 2019

Source: Sberdata Laboratory

As can be seen, the main impact of the crisis has been experienced by the population's demand for services. In the goods segment, there was a significant drop in demand for non-food items; since the end of April, the level of expenditure on them is recovering, although it has not yet reached the values of last year.

At the same time, the demand for food products has exceeded the values of last year since mid-March, the dynamics of demand have been kept in positive values for a month and a half with one short correction.

As the analysis of the dynamics of population spending on certain categories of goods and services shows, the segments that form the bulk of demand for packaging, by the time of writing, were practically not affected by the crisis.

Figure 8. Changes in spending on key spending areas in real terms, relative to the comparable week of 2019

Source: Sberdata Laboratory

The study also includes the largest online traders. This circumstance provides additional confirmation of the effect of soft factors on the dynamics of demand for packaging.

In general, it can be concluded that the greatest negative impact on the packaging industry is currently exerted not only externally in relation to the industry, but rather internal factors.

It is difficult to say how the situation will develop even in the near term, but in the least favorable scenario the imposition of external negative factors on the industry crisis will lead to very adverse consequences for the industry.

The balance of market dynamics looks relatively favorable for the industry. The following factors will support the growth of demand for packaging:

  • changing consumer behavior, the growing popularity of Internet commerce, including after the lifting of restrictions;
  • Restoring demand in the consumer market segments affected by quarantine;
  • another wave of import substitution associated with the devaluation of the ruble.

Directly in the current year, the increase in demand for packaging can be facilitated by a decrease in the outbound tourist flow and, as a result, an increase in domestic consumption compared to previous periods.

In the future, after the end of the crisis phase, the demand for packaging can be supported by the expansion of exports of packaged products.

Factors limiting the growth in demand for packaging include:

  • The overall decline in consumption due to the decline in self-isolation income;
  • Return to normal packaging demand from segments where high-end sales have been recorded;
  • prolonged decline in demand for durable goods due to declining incomes.

The decrease in incomes of the population will mean an increase in the share of mass and economy-segment products in the range of retail. Large producers are able to ensure the growth of low-price product supply.

In the packaging consumer industries, especially in different segments of the food industry, we can expect an increase in market concentration and, accordingly, strengthening of the market position of the main customers.

 

One of the positive results of the current crisis may be the increasing concentration of the packaging industry

As mentioned above, the volume of confirmed projects to increase production capacity by the end of 2021 amounted to 1.3-1.4 billion sq m per year, which, taking into account previous forecasts of growth in demand for packaging, led to a decrease in capacity utilization to 64% compared to 68% in 2019 and 69.7% in 2018.

General economic constraints will certainly lead to longer implementation times or even abandonment of some projects, but given the downside of packaging demand, we can expect a drop in capacity utilization below the projected level.

This will mean further increased competition and its transfer mainly to the price sphere.

Increased price competition provides obvious advantages to integrated players. Packaging manufacturers, integrated with the production of paper cardboard, get an obvious gain in costs.

Pulp cardboard producers are able to cover losses in the domestic market by expanding exports. To provide their own production of packaging raw pulp players will be able to expand purchases of recycled cardboard, the supply of which is clearly growing on the market.

Strengthening the market power of large packaging consumers, in turn, improves the position of large packaging suppliers. Possession of the best technologies in both the manufacturing and management sphere will provide large packaging manufacturers with the opportunity to provide consumers with not only the best product, but also better support and additional services.

Medium and small packaging manufacturers, especially those not integrated with raw materials production, will be pushed into relatively narrow market niches.

In addition, small and medium-sized producers may have difficulty accessing financial resources. The decrease in profitability against the background of the devaluation of the ruble will limit their ability to carry out routine maintenance and repair of technological equipment.

As a result, the amount of capacity available on the market will decrease, the pressure on the price from excess capacity will decrease. Thus, one of the positive results of the current crisis may be the increase in the concentration of the packaging industry.

In general, the issue of the industry's sanitization is long overdue. The overcapacity for packaging was developed in the Russian market in the first decade of the 21st century, against the backdrop of a rapid growth in demand for packaging and a wide supply of cheap technological solutions from China and Turkey.

 

The reduction of capacity in the Russian market can take place in a very strict mode, mainly through the bankruptcy of a number of enterprises

The crises of 2008-2009 and 2014-2015 did not lead to a significant loss of capacity: the only known example is the preservation of the Software Capacity of Gofr (Dmitrov), but the company was subsequently bought out by the Ilim Group and is now operating successfully.

At present, even the largest Russian players do not have the resources needed to consolidate the industry. A landmark event in 2019 was the acquisition of a 50% stake in the leading Russian manufacturer of cardboard and corrugated packaging SFT Group of Austria's Prinzhorn Group.

Previously, the investor announced plans to increase the share in SFT to 80%, but recent economic events clearly shift the implementation of these plans indefinitely. Other potential investors will also be inclined to refrain from investing in Russian assets, at least until the end of the crisis phase.

Thus, the reduction of capacity in the Russian market can take place in a very rigid mode, mainly through the bankruptcy of a number of enterprises.

The group most at risk includes producers who are not integrated with raw materials supplies; operating morally and physically obsolete equipment and, in this regard, offering a limited range; Burdened with high credit load; remote from the areas of concentration of large packaging consumers.

Similar problems have also arisen in the production of cardboard. As mentioned, the significant introduction of production capacity in 2019 caused a sharp imbalance of the market and a drop in prices.

The participants in the cardboard industry also face a number of pressing problems, which further exacerbated the overall economic crisis.

New projects to produce paper-based cardboard, as well as existing manufacturers, face a problem of commodity safety.

Resources for the growth of the volume of waste paper ms-5B brand is almost exhausted: the level of collection by the end of 2019 reached almost 90%, not covered by the harvest remains volumes that are not appropriate to collect for commercial reasons or which can not be recycled for technical reasons.

Figure 9. Education and collection of waste paper in Russia by stamps in 2019, million tons

Source: Center for Systems Solutions

The use of paper tar cardboard in packaging production is growing steadily and by the end of 2019 reached 73%. As the proportion of paper tar cardboard increases, the proportion of short fiber in total mass will increase.

Modern equipment and technology are needed to achieve the required physical and mechanical indicators of cardboard in the face of increasing fiber degradation.

Figure 10. The structure of the use of

raw materials in the production of corrugated cardboard in 2015-2019, t, %

Source: Center for Systems Solutions

The manufacturers of cardboard are as acute as the packaging manufacturers face the problem of increasing competition and transferring it to the price sphere. A number of parallel solutions to this problem are possible.

First of all, it will be necessary to restore the balance in the market by reducing supply. The most obvious ways to solve this problem are the expansion of the export of cardboard, as well as the implementation of full-fledged technical regulation in the industry.

The latter will limit market access to facilities that do not meet the requirements of the best available technologies.

Another way out of the crisis is the opening of new market niches, primarily related to the replacement of disposable plastic products.

The potential for plastic replacement in segments such as disposable utensils, retail packaging, bag paper and others is currently estimated at 1.5 million tonnes per year. This estimate is almost entirely in line with the forecast of the introduction of container cardboard production capacity for the period up to 2022.

An important factor in improving the sustainability of the cardboard industry is the reform of the Manufacturer's Advanced Responsibility Mechanism (ROP).

The need to translate the economy into a closed-loop model and the application of ROP was explicitly stated in the President'sJanuary Address to the Federal Assembly.

The instructions contained in the President's Messageare reflected in the instructions to implement the provisions of the Message:including, until March 31 of this year, it was necessary to develop the concept of improving the mechanism of the ROP, until July 1 - to make changes to ensure the implementation of the concept in the legislation, but the discussion of the Concept was postponed to the fourth quarter of this year.

 

Moscow waste cookers mistakenly extended the assessment of the situation in the local market segment to the entire market, which led to a rush of price increases

The current draft Concept provides for separate regulation, transfer of responsibility for packaging recycling and non-use of packaging recycling standards.

Important aspects of the draft Concept are the exclusion of all ways of executing ROP, except for the payment of an environmental levy, as well as the intention to direct the environmental levy to compensate the companies that recycle.

Implementation of these provisions will cause noticeable changes in the industry. First of all, the innovations will be beneficial to recycling plants - manufacturers of cardboard, which will actually receive subsidies for the purchase of waste paper.

However, during the last month, the recyclers again faced the problem of shortages and the cost of raw materials. Restrictions imposed to combat the spread of coronavirus have reduced the amount of waste paper.

To a lesser extent, this process has affected retail trade, the main source of MS-5Bwaste paper, but a number of manufacturers, in an effort to secure their purchases, have begun to offer their suppliers higher purchase prices.

In the country as a whole, there were no preconditions for a significant reduction in the formation of MS-5B waste paper: as the Sberdatalaboratory shows, the volume of food trade has increased during the restrictive measures.

However, this circumstance was not taken into account by the producers working in the Moscow market, who recorded a local decrease in the volume of waste paper.

The decline in waste paper in Moscow is understandable. Under the restrictive measures there was a temporary decrease in the population of the city - at the expense of watch workers, migrant workers, non-resident students, tourists, as well as as a result of the departure of the city's residents to the summer cottages in the Moscow region or even to other regions.

According to current estimates, the temporary reduction in the population of Moscow was 37%. Together with the population, the consumption of goods in Moscow decreased - and, as a result, the formation of waste paper.

Moscow producers mistakenly extended the assessment of the situation in the local market segment to the entire market, which led to an increase in prices, which is frankly agitated.

However, the main beneficiary of this hype were waste collectors, namely, retailers, primarily large online retailers.

The paradoxical situation in the waste paper market underlines the importance of high-quality, reliable, adequate and timely information for making adequate decisions during a crisis.

 

The use of Rosstat's data in operational production management is impractical and, by and large, impossible

The most accessible and in fact the only open source of information about the production of corrugated cardboard and packaging from it is currently the Federal State Statistics Service of the Russian Federation(Rosstat).

However, for a variety of reasons, the use of Rosstat's data in operational management is impractical and, by and large, impossible.

First of all, Rosstat's data is updated once a month with a delay of two weeks to twenty days or more. There are no specifics in the operational accounting of the aggregate annual data. Information regarding the cardboard and packaging industries is only available in detail to the federal districts.

To use official data in the day-to-day activities of enterprises requires their significant correction, which each of the market participants conducts independently, while receiving, as it can be understood, different assessments of market indicators.

To some extent, the informal social networklinking the industry at the level of specialists and managers allowed to level these discrepancies, but the normal functioning of such a network is possible in a stable market, while in the crisis the mood of each for themselvesis exacerbated.

 

Only industry participants can solve the problems of information support for the industry

The tool that allows the industry to get to know itself and tell others about itself, to establish a dialogue inside and with external counterparties, is already a well-known to the participants of the industry Price Index for the main products of cbp from the Center for Systems Solutions.

If the index's information base is filled with data on a wider list of indicators than now, the leading market players, together controlling 60-70% of gross output, will take an active part, an adequate picture of the industry will be built.

Moreover, it will be possible to move from the monthly publications of the Index to weekly, and to specify a single publication by country in regional issues. In the longer term, the Index will allow participants to assess market dynamics in real time.

Thus, the crisis phenomena faced today by the packaging and packaging industries are more of a result of internal causes. External factors can only exacerbate the impact of the industry crisis on industry participants.

The crisis has significantly exacerbated long-overdue problems of consolidation of industries, but today consolidation processes can bring more sensitive losses to industries than if they were in a more stable environment.

The situation opens up new opportunities for both packaging manufacturers and suppliers of cardboard, but to take full advantage of them will be able to those market players who will be able to better track and assess the direction of changes taking place in the market.

Information is a key resource in times of crisis. Only industry participants can solve the problems of information support for the industry.

Fully read the Review of the MS-5B waste paper market, cardboard and corrugated products in 2019, prepared by the Center for Systems Solutions commissioned by UC OBF LLC, can be found here and here

 

Resource: https://gofro.expert/novosti/b-rynok-upakovki-iz-gofrokartona-vyzovy-i-otvety-na-nih-b/