Are carton price rises on the way? An acquisition of the two largest's packaging suppliers.
DS Smith, the UK-based recycled packaging supplier, has indicated its intention to buy its Swedish competitor SCA Packaging (Svenska Cellulosa Aktiebolaget) in a deal that will be worth Euro 1.6 bn.
The value of SCA shares leapt by 10% when the news was announced on 17 January; DS Smith shares also rallied by over 3%. The two companies are already the second and third biggest European suppliers; the acquisition will allow the new company to rival the market leader Smurfit Kappa for top slot. The deal is subject to regulatory approval and a vote by the DS Smith shareholders due to take place on 3 February.
Jan Johansson, president and chief executive of SCA said that his company was selling its packaging division “primarily to enable increased growth in the hygiene business”. It did not consider the packaging side of its business to be “core” however emphasised that this did not mean that it had been ignored. Analysts say that the acquisition is a “good fit” for DS Smith. Currently Smith is a leading producer of recycled packaging in France and the UK. The deal will open up new opportunities in Germany, the Netherlands, Switzerland and the Nordic countries.
The acquisition will set alarm bells ringing in the European moving industry. For many years DS Smith and SCA have been rival suppliers with the competition between them helping to keep prices under control. Despite this the industry has been fighting price rises for cartons but has nevertheless seen a steady increase.
Between the three companies they held a virtual monopoly on the paper supply for Europe. Even if you but from a smaller supplier the chances are the paper comes from one of the big three. Prices have eased a little lately but the received wisdom is that has only been because of lower than expected demand before Christmas. In an interview today (18 Jan 2012), Andrew Simpson of Simpson’s packaging, said that increased prices might well be the result. “It’s too early to tell yet but this development is likely to put more upward pressure on prices.”
David Trenchard was one of the founders of BAR Services. He was concerned about the impact on the industry of the merger. “I just wonder what the future holds,” he said. “Perhaps it’s time for looking at re-usable plastic crates again in huge quantities as with one dominant supplier I can imagine prices will not stand much resistance to increase especially in busy times.”
As the new merged company rationalises its business, as no doubt it will, there is a chance that paper mills will close and supply will be curtailed thereby forcing the prices upwards. If moving companies are to avoid seeing their profits reduced even further, it’s essential that they pass on any increases in full to their customers.