Headline: Fall in demand for packaging accelerates

Source: Financial Times, 30 August 2001

URL: http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3JN0NUYQC&live=true&tagid=ZZZHJ52NA0C

Sales of cardboard boxes, a sensitive indicator of the state of the US economy, fell more sharply in the first half than at any time in the last two decades according to Jefferson Smurfit, the world's largest producer.

The company reported pre-tax profits unchanged at E175m ($160m) for the six months to June 30 on sales up 5 per cent at E2.3bn. Gary McGann, chief operations officer of the Irish-based paper and packaging company, said there was "no indication of an immediate recovery" in demand, which has tumbled 5.5 per cent since the start of the year.

The fall in sales of the corrugated boxes used in the packaging of consumer non-durables such as food and drink is further evidence of the US recession biting as domestic demand slows, US exports of manufactured goods fall and the strong dollar makes imported goods more attractive for the consumer.

Smurfit has taken a leading role in seeking to bolster prices by reducing factory output, either by closing plants or taking mills out of production temporarily.

In the past two years, Smurfit has reduced its containerboard capacity by 15 per cent against a US industry average of 10 per cent and 7 per cent in Europe. In total, the US industry has reduced capacity by close to 4m tonnes.

There may be further capacity rationalisations following the announcement yesterday of the $3.1bn merger of Mead and Westvaco, two US forest products company. The new entity will have annual sales of $10bn and it expects to make savings of $325m in the first two years.

However, prices have continued to fall with containerboard down $35 a tonne since January from $475 to $440. This resulted in a falling contribution from Smurfit's 29 per cent owned US associate, Smurfit Stone Corporation, which was down 38 per cent to E107m.

This was partly offset by increased profits from Smurfit's European and Latin American operations.

The company reported some inventory build-up across the European paper industry in the first half. But Mr McGann said European inventories "peaked in May and started to decline in June".

He said: "Major producers now understand the need for the product to meet and not exceed consumer demand. The combination of these factors means that there is the potential for a demand-led recovery. This would also be a first. The general expectation is that pricing could recover from higher levels."

Joe Burnell, analyst with Davy's stockbrokers, said: "Smurfit has held its nerve and resisted increasing production. As a result, you are not seeing the same price volatility as in previous downturns."

-- Andre Weltman (aweltman@state.pa.us), August 30, 2001

Answers

Another great observation, Andre. For the past 40 years I have been watching this figure closely. It has always been an accurate, sensitive, early warning signal of impending recessions. For some reason, I lost track of the figures this time, and was glad to see that you found, and posted, them.

-- JackW (jpayne@webtv.net), August 30, 2001.

Maybe now is the time to go short on the stock market. Does anyone have any thougts on this?

-- Chance (fruitloops@hotmail.com), August 30, 2001.

I would rather "go short" in the commodity options market. I've been doing this for some time now--buying CRB and copper puts--and it has been paying off. Leverage is much greater than selling short in the stock market. Example: 3 years ago I bought a bunch of gold calls at $100 each. A week later, just after the European banks announced they would no longer sell gold, and the price of gold shot to $330, I sold the calls at $650 each.

-- JackW (jpayne@webtv.net), August 30, 2001.

Yep, the well known "Paper board" indicator printed as a graph in the WSJ

It has about a three month lead time over the Economy. Figure we tank in Oct-Dec timeframe...slow workout 2002 with the Demos taking back the Congress, Big Time.

-- lael (lael@paper.net), August 31, 2001.