Pandemic Reshapes Global Carton Industry as European and US Giants Ride E-commerce Delivery Boom to Sharp Valuation Gains

The packaging sector rarely changes speed suddenly, yet COVID-19 has clearly caused an extraordinary shift in the carton industry, a major part of the packaging landscape.

Over the past 18 months, lockdowns of different levels forced millions of people to move from offline spending to online buying. This has also improved the outlook for the $350 billion paper packaging industry at the heart of e-commerce. According to consultancy Smithers,

the amount of cardboard used to move goods from retailers to homes jumped by nearly 40% last year.

Carton packaging companies that were once low-profile now have stocks pursued by investors of all types. Since the stock market fell to a low in March 2020 because of the COVID-19 pandemic,

London-listed Smurfit Kappa Group's share price has increased by 84%, that of rival Mondi by 58%, and New York-listed International Paper's stock has almost doubled.

These three are heavyweights in global corrugated packaging, and they also supply linerboard, corrugated paper and other paper grades for making corrugated board to the global paper packaging market. As more daily life goes digital, capturing the pandemic-driven carton delivery boom helps ease the brief and unavoidable decline in paper demand caused by the pandemic.

Oscar Lingqvist, an industry expert at consultancy McKinsey, said:

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

As governments worldwide resolve to permanently reopen economies, the difficulty and challenge facing the industry is -

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

Over the past six months,

the price of waste paper and other raw materials for carton production 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, CEO of Smurfit Kappa Group, Europe's largest corrugated packaging company and a member of the London FTSE 100 Index. "The situation looks very positive. The pandemic has accelerated e-commerce, and this trend will continue."

▲ Tony Smurfit, CEO of Smurfit Kappa Group

In fact, executives at corrugated packaging giants say their greatest fear is being unable to keep up with demand. Sourcing linerboard, the paper used to make corrugated board, is a complex task. Global packaging giants procure in different ways. Mondi manufactures entirely from virgin fiber and recycled fiber, which is then used to make finished cartons. UK company DS Smith, a London-listed FTSE 100 group, also buys large volumes of raw materials for its carton production.

"Market supply is very tight," said Andrew King, CEO of Mondi, whose company's market value has risen 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."

Because of 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 rising costs on to retailers.

Investors enthusiastic about the industry's prospects say they are not only counting on the pandemic to accelerate the shift to e-commerce. Paper packaging 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 fulfill commitments to eliminate unnecessary or problematic single-use packaging as early as 2025. Suppliers are looking for 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, CEO 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 different market needs.

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

As a result, more and more people believe the industry must now achieve innovation and development through consolidation. Mondi reportedly 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 influence that multinational customers want. "I don't think European companies are big enough to affect the US market, but the US market needs the kind of innovation awareness that European companies have."

If greater production and corporate scale are needed, M&A will face 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