FOEX: Split continues in directions prices are taking for recycled versus virgin-fiber containerboard grades in Europe; due to competitive conditions, stronger euro, virgin-fiber indexes decline, while firmer markets boost prices for recycled benchmarks

HELSINKI , December 31, 2013 (press release) – Containerboard Europe – In the US, a good year in packaging industries appears to be ending with more modest tones. November box shipments were down by 2.5% in actual volume terms but, taking into account the number of shipping days, up by 2.6% on an average week basis. The”truth” of the statistics was probably marginally positive. Approaching the seasonally weak period, US containerboard operating rate fell from the earlier seen mid/upper nineties to just under 91%. Low production eased the containerboard inventories down by 40 000 tons from end October.

In Europe, the split market pattern between virgin fibre and recycled grades - seen over the recent months - has continued through December. For testliners and fluting, the order books remained quite full and little, if any, extra downtime was taken over the Christmas holidays. In these grades, prices have also kept inching up. In virgin fibre liners, grown imports and challenges met in exports have kept the supply/demand balance clearly weaker than in the RP-based grades and the prices have been slipping lower, partly also driven by the Euro-strength.

The currency movements brought again this time downward pressure on our indices as the Euro strengthened by 1.2% against the USD and by about 0.2% against the weighted basket of the non-EMU currencies. Our packaging indices moved again to different directions. The PIX Kraftliner index declined by 87 cents, or by 0.15%, landing at 574.89 EUR/ton and the PIX White-top Kraftliner index drifted down by 80 cents, or by 0.1%, to 760.06 EUR/ton. The PIX Testliner 2 index crept higher by 14 cents, or by 0.03% and closed at 479.76 EUR/ton. The PIX Testliner 3 index value went up by 13 cents, or by 0.03%, closing at 459.49 EUR/ton. The PIX RB Fluting index moved north by 12 cents, or also here by 0.03%, and settled at 450.66 EUR/ton.

General Economy – US:  In spite of several disturbances during the year, the American recovery has been picking up speed, as shown by the quarterly GDP-growth series (annualized): Q4 2012: +0.1%, Q1 2013: +1.1%, Q2 2013: +2.5% and Q3 2013: +4.1% making that Q3 the fastest quarter for economic growth in two years. The substantial upward revision was fuelled by several sectors of economy with household spending and business investments into real estate, equipment and intellectual leading the pack. One worrying piece within the good news was that inventory build-up accounted for over 1% of the GDP-growth during Q3. As that is unsustainable in the longer-run, tapering down of the growth can and should be expected. But even with a slower growth during Q4, upward revisions are now likely also for the annual data, where the latest consensus still predicted only 1.7% growth. The hopes are rising also as to the recovery rate in 2014, even though the stimulation efforts by the Fed will be tapered down and the diminishing emergency aid programs for the jobless will cut down the private spending among the lower income groups. At present, the range of 2014 real GDP-forecasts is from 2.5% to 3.4% with the majority suggesting about 3% or just short of it.
Europe – While the UK is today one of the strongest growing economies in the world, the Euro-zone continues to suffer from very unequal economic development and from the persistently over-valued Euro. Plotting the Euro/USD development over the past 18 months against the export growth of the German manufacturing industries shows a good correlation. Unfortunately, the flagship of the European exports does not represent the European economy very well at all. Still, the outlook is gradually improving – much more gradually than what it would, if the ECB mandate included also other things than watching out over the inflation rate. The bleakness in Q4 shows especially in the retail sales which went further down in December with the Markit Eurozone Retail PMI at 47.7 points sinking further into the recession territory. Another bad news is that in most countries, people really do not believe in the politicians’ capability of solving the problems in 2014 either. The good news is that the worst of the financial crisis could be over as capital has started to return. The Euro-zone GDP forecast for this year remains at -0.3%/-0.4%. In 2014, a positive growth of 1% could be seen but the odds are rather for a lower growth than that, especially if the Euro remains badly over-valued.
Japan - Apart from the still subdued domestic private consumption, Japanese economy is enjoying a rapid growth. Household spending may get some support in the coming weeks from two sources: 1) The sales tax rise in April 2014 could trigger more purchasing in anticipation of that rise 2) Manufacturing growth is so strong that it has finally started to show also in a rise in manufacturing employment. That rise is still quite modest compared to the very strong growth seen in the actual manufacturing output, in new orders and in order backlogs. The Markit/JMMA Manufacturing PMI is up at 55.2 points in December, slightly higher than in November. The improvement in overall business conditions is the strongest since 2007. Year 2014 outlook is less strong, due to the negative impact of the sales tax hike but in Q1, the going is highly likely to be quite good.
In China, the Central Bank needed to take action to avoid another crash crunch this year – one was already seen in June. As a rescue measure, the Bank has pumped about 50 billion US dollars’ worth of additional money/liquidity into the financial system, after the indicators started showing a clear tightening of the liquidity in late November/early December. The weakness of the private banking sector and the still substantial use of the “shadow” banking systems demonstrate the fragile nature of the country’s financial system and the need of the Central Bank to monitor the financial system and to find, one day, a stronger and much more market-oriented approach. In the Chinese manufacturing sector, the stronger growth of the export countries helps and the new order intake is promising. In many other respects, China’s economic growth is likely to remain modest – in Chinese standards – also in 2014.
Paper industry – The year 2013 ended with another set of weak graphic paper numbers. Fortunately, the going has been clearly stronger in the other sectors, tissue and different packaging products and the global paper and paperboard industry production and consumption statistics will end up showing 2013 volumes several million tons above 2012 results, in spite of a clear, multi-million ton drop in the printing and writing paper production/consumption in the industrialized world.
Price-wise, the development was very uneven. With active supply adjustments to match the fall in the order volumes, North American supply/demand balance was not much below the long-term average even in printing and writing papers and, consequently, prices did not fall much and in some grades not at all. Naturally the weakness of the US and Canadian dollars against the European currencies helped to keep the exports flowing and limited the desire of other nations to ship to the NA markets. In Europe, a quick look over the annual track-record of our various paper and board indices shows the picture clearly. Prices of the recovered paper based liner-boards with little competition from imports were up between 12.6% and 16.7%, depending on the grade. Brown virgin fibre kraftliner, with regional production competing with imports from East and West, was down by 1.6%. Graphic papers with sinking demand, substantial over-supply and with a history of substantial exports outside Europe fared even worse. In addition to a clear loss of volumes, prices were down in copy-paper, the most positive grade, by 3%. In other grades, the declines varied from 4% to little over 4.5%. Even with serious cost-cutting programs, the profitability numbers provide pretty sad reading.

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