European and global demand for paper packaging: what does the future hold? | Article

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First the pandemic, now the war in Ukraine with rising inflation and rising fuel prices, and all the while the pressure to move away from plastic. Amid such turmoil, what does the future hold for paper packaging growth?

Neil Osment, managing director of paper packaging industry analyst NOA, talks to Packaging Europe about his forecast.

Demand for paper-based packaging, whether corrugated or folding cartons, has been on the rise across Europe for at least two years.

But, if you look at recent numbers, you could be forgiven for thinking something went wrong. In the first three months of 2022, demand for corrugated cardboard has declined across Europe, and all the growth that occurred in 2021 has now collapsed. We were at +7% corrugated in the UK in 2021 and are now at -8% (and the figures for Europe are similar).

So what caused this fall?

One of the factors is the destocking of finished boxes and cartons, as well as cardboard. Because there had been such a shortage of product (remember all the news about supply chain issues, packaging shortages, and truck driver shortages?) – and fearing getting caught in new – packaging companies, brand owners and end users had all over-ordered in 2021. For the first three or four months of 2022, they used this stock. Packaging companies that supply producers of FMCGs, in particular, have maintained higher than normal inventory levels because their customers have had such high demand for the product.

The consumption of corrugated cardboard, and to a lesser extent cardboard, had started to slow down in the second half of 2021, as we no longer worked from home, moved or ordered products online.

Also, after June 2021, we might again be spending our money on dining out and vacationing, so we’ve diverted our spending to events, experiences, and getting away from it all rather than ordering tangible products online. Anyone trying to book a coastal rental property for a holiday last year will remember how hard it was to find – and we’re talking all over Europe, as well as the UK.

In the first half of 2021, growth in paper packaging products was around +10%, but in the second half it slowed to +2% – a good growth rate for paper packaging, but more modest.

This year, in 2022, the trend of spending more of our disposable income on vacations has continued. We can now go abroad, and all over Europe – as we have seen – airports and ports are packed, people are scrambling to get away and we haven’t even reached the high yet season. It seems that we prefer to visit the real Amazon, rather than shopping on Amazon! In fact, Amazon’s sales numbers are down 15% in 2022 from last year – a huge indicator of people’s mindset.

In addition to all of the above, you have to consider the rising cost of energy across Europe, as well as inflation, which is forcing us to tighten our belts. We’re just not spending like we did at the start of the pandemic. Indeed, at NOA, we believe the impact of reduced consumer spending has yet to be fully felt across all sectors, including paper packaging. He will start biting very soon.

But before we get too gloomy, let’s recall that 2021 has been a banner year for growth for most sectors of the paper packaging industry. Things have cooled down, but that doesn’t mean they’ve gone backwards. Demand for corrugated board is still up 2-3% from 2020 – that’s nice steady growth.

The trajectory is still upward, thanks to a combination of natural growth and an overall increase in packaging used to promote and distribute products; there has been a boom in the use of ready-to-use packaging, especially at discount stores like Lidl and Aldi, which are absorbing increasingly large shares of national supermarket spending.

And there is a third factor: the green wave. Innovations in paper packaging are noteworthy: cardboard sleeves for cans of soup or baked beans in multipacks, paper trays for tomatoes and a very recent innovation from Smurfit Kappa: a paper laundry box with childproof. What else is going on? We watch this space with interest.

Cardboard has a longer latency time than corrugated cardboard, which reacts much faster to market forces. In the cardboard industry, like a supertanker, it may not act as quickly or as sensitively, but we expect it to follow the same path as corrugated cardboard. Currently, in 2022, the folding box market is as buoyant as it was two years ago.

This is due to a number of factors. First, a high percentage is destined for the food and beverage market; second, a lot more inventory is held in the supply chain, which hasn’t caught on yet; and thirdly, there is not much production capacity available for the paperboard needed to manufacture the paperboards, which keeps the demand high. Cartons are growing at +4-5% currently and the green wave is having a very positive impact on the demand for cartons, so again, watch this space.

So what happened in the world? The Far East has seen strong demand, but this has cooled recently, particularly due to the impact of Covid on China; more than 100 million people are estimated to be still isolating at home (and unavailable for work). Other parts of the Far East could experience the same. America has fared slightly better than Europe in terms of growth in 2020/22, and Africa and South America have tended to mirror Europe.

And where are we now?

In the short term, the impact of the war in Ukraine on the markets is likely to cause great disruption to the system, as producers turn to alternative sources of energy and minerals, rather than relying on Russia. Wheat starch in Ukraine and Russia is used in the corrugated board process, which will impact production as alternatives are sought from places such as the United States and Africa. Russia is a major supplier of wood, used for pallets and paper pulp, to Scandinavian paper mills. Again, alternative sources will need to be secured, and again, the United States is a likely option.

After that ?

For the remainder of 2022, we expect the -8% for corrugated in 2022 YTD to improve as consumption recovers on its own as the overstock issue eases . By the end of the year, we risk being at -2 to -4% or, at best, at equilibrium. But it’s important to remember that this still represents overall growth from 2019/20.

Looking ahead, in 2023, the necessary supply realignment triggered by the war on Ukraine will still be felt. However, by 2024 markets are expected to stabilize and we expect steady but more modest paper packaging growth of between 2% and 2.5% for the next few years. This will be due to natural growth and the green wave.

That’s right, the conflict in Ukraine is hitting the green wave’s momentum – stores in Iceland, for example, have admitted they won’t be able to keep their promise to be plastic-free for their own-brand products by 2023 – but the environmental pressure is still there, and growing.

And there is another factor to consider. The supply chain has proven to be of paramount importance and the reliance on China for the supply of goods is impacting the western world. We anticipate that we will see a gradual shift in the offshoring supply of our goods away from China and into other Western countries like America, plus India and Africa, and, of course, to the Europe too.

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