Australia’s folding boxboard market is under increasing pressure from substrate imports and consolidation looks inevitable, according to the latest Pulp & Paper Edge Intelligence Report from industry bible IndustryEdge (IE).
Australia’s folding boxboard market is under increasing pressure from substrate imports and consolidation looks inevitable, according to the latest
“Despite the depreciation of the Australian dollar, imports of pre-converted folding boxes (or converted cartonboard) further eroded the domestic sector, growing by 3.9% for the year to end of May 2015,” says IE.
“Further evidence of the resilience of imports is that the average price has observably continued to grow over the last year. At AUDFob2,631/t, the average price is 19.9% higher than a year before. Price increases of this magnitude suggest that the segments being supplied by the imports are reasonably stable though observably under pressure. From a supply perspective, China has dominated imports to Australia for several years and in May 2015, it delivered 57.5% of the total.
"The structure of Australia’s folding box-board market is similar to most major packaging markets in that a relatively small number of producers dominate delivery to a wide range of end-users. Inevitably, this gives rise to a very wide supply offering, which is considered to represent operational challenges in a small market."
Converters and their merchant suppliers are obliged to tightly manage inventories, yet must retain a volume of supply to meet diverse demand, says IE. “The impact on margins can be acute, particularly in a conversion market that is over-capacity, faces constant challenges from the seemingly more innovative flexible packaging sector and that ultimately, seems to be overdue for a further round of consolidation.
‘The suspicion is that the value of folding boxes is not being rewarded in the market with the prices that a rationalised sector could command. The sector’s fragmentation has seen pre-converted imports rise, further eroding domestic market opportunities and value.
“Without overplaying the situation, IndustryEdge considers sector rationalisation cannot be far off. Perhaps how that will happen, remains the better question. For its part, Colorpak has done some heavy lifting. It consolidated the former Carter Holt Harvey operations in Australia into its business over the four years to the middle of 2014. Orora, the largest player in the market, is the logical player to make a rationalisation move. Their options are quite broad because any single acquisition would still see their market share below 50%. Others, including the always-capable Visy, could expand their share of the market through acquisition and rationalisation."
There is at least one other option being considered in the market, according to IndustryEdge.
“The recent acquisition of Jalco by Pact Group Holdings gives rise to some options for consolidation. Jalco’s product lines include personal care & cosmetics, food & beverage and promotional packaging components, each of which uses, to some extent, folding boxes. It is not clear whether Pact’s strategic interests extend to the cartonboard sector, but there is speculation in the investor community about such a development being possible.
“Rationalisation remains challenging however, in part because the cost of entry to the conversion sector is relatively low. Import competition is also an element of concern to those who might be considering rationalisation. Ultimately, those issues cannot be addressed in the market until there is sectorial consolidation and tighter integration.
“Most of the discreet sectors of the Australian packaging market are rationalised or at least, undergoing consolidation that will lead to rationalisation. Such a move is overdue in the folding box conversion market and value seems to be the victim right now.
“No party in the supply chain – including the end-users – is immune from the pressures. Regardless of the importance of end-users, it is the converters that need to make the moves to improve the structure of the sector. It may not yet be urgent, but it is increasingly important, as fragmentation is demonstrating.
“That said, we are only observing the beginning of a sector wide awareness and activity on the consolidation front. If that is the case, the situation of challenging value extraction may need to get tougher, before it can get better.”
