European sack kraft prices dip into Q2 amid high stock levels
There are still challenges that lie ahead for the European sack kraft market
Market contacts painted a mixed picture of how the sack kraft paper market ended the first quarter (Q1), with a small handful of sources reporting seeing “light at the end of the tunnel,” many suggesting that the supply chain is still mired in high stocks and that a pickup may not be seen in the first half of the year, and a fairly broad consensus that 2023 was the first “normal” year, albeit one with very low demand, since before the pandemic.
Weak demand throughout Q1 resulted in price reductions of some Euro 100/tonne in continental Europe for unbleached paper moving into Q2. Bleached paper generally saw reductions of some Euro 50/tonne.
Some were cautiously optimistic about Q2 and that the Easter holidays, traditionally a seasonal turning point in the year, would be a time for demand to improve. “We are seeing spring shoots,” said a converter. “It is hopefully picking up,” he added. “As always, it is not a question of if but when demand will pick up,” said one producer.
Still, others were less optimistic. “I don’t know if Q2 will be better,” said one producer. “Converters are not waiting on prices [to come down]. They are just full.” Another producer agreed with the gloomy assessment. “I think this year will be rather flat. I don’t see the market having reached a bottom yet,” said another. “I do not see any positives at the moment,” he added.
A number of sources suggested that it would be strange for the downturn not to come after such banner years in 2021 and 2022. “The market situation is quite a normal reaction to everything else moving with interest rates and the broader economy. Not having this [lull] would be artificial. At some point, it has to soften,” said a producer. “It does not make sense to compare demand or for that matter, turnover and earnings before interest, tax, depreciation and amortization to the pandemic years,” a trader said. “It should be compared to 2019, and I think compared to that year, we are still seeing small growth,” he added.
Some producers reported taking downtime, slowing production or planning to extend stops for the Easter holidays. “This is an event,” weighed in one converter on the decision to limit capacities. “It is the equivalent of saying ‘we want to keep prices as high as possible. We want to fight against erosion,’” he added.
Though costs have decreased for producers, many of them highlighted that compared to years past, paper production in Europe is still expensive. “We cannot lower prices much because of high inflation,” one unbleached producer said, citing salaries, wood and chemical prices.
Unbleached stocks are still full
Availability of unbleached sack kraft paper was said to be good with short lead times. And, as demand continued to be flat later into the year than producers hoped, prices dropped.
A slow construction market due to seasonality and a low level of housing starts as a result of the macroeconomic situation hampered demand for sacks for cement and other building material. “People are not going to buy new houses now [with the increased interest rates],” said one converter, and a number of his colleagues echoed the sentiment. “The market is very low at the moment. Demand for bags is absolutely gone and customers are delaying orders. There is too much packaging in the supply chain,” said another converter.
Determining the true demand situation presented converters with challenges in the first quarter. “We cannot see what the real level of demand is because of all the stocks. But, looking past the safety stocks, I would say that it feels like a pre-pandemic year, something like 2016 or 2019,” weighed in one. “Some customers have enough bags for six months, some for one year. When it was buy, buy, buy, they were not using the bags, they were putting them in stocks. However, I would not be all that surprised if the market starts to explode again in July, August or September,” he added.
The sanctions continuing to block Russian sack kraft from the European market aided in balancing the situation, said some sources, adding that with imports coming in from the United States, Latin America, Turkey and other countries, if there was still paper coming in from Russia, there would be a real glut.
An exception to the slide in prices was seen in the UK, where prices stayed largely stable. Still, this seemed tenuous. “Producers are trying to hang on [to their current levels],” assessed one converter. Spot prices overseas continued to fall as well, with one producer reporting “much bigger drops” in the Middle East and Asia, saying that the reductions on the overseas spot markets are double what has occurred in Europe.
Bleached sack kraft paper prices slide
Prices for bleached sack kraft paper slid by some Euro 50/tonne although some sources reported flat pricing into Q2.
“It has been a very strange first quarter. We had a record dispatch in January, maybe the highest ever,” a converter said. “Then in February, it dropped to an all-time low. March was still slow, which was to be expected as there were lots of destocking effects going on,” he added.
“The market is quiet at the moment […] Buyers are saying, I don’t need sacks now, could you please produce them in May or June?” said another converter. “We have come back to old times. Everyone is looking for the Easter pickup, but for now they have a good stock of sacks and I have paper. I hope this is the reason for the market downturn and not because of [lower consumption],” he added.
And with the destocking effect causing the market to lag considerably, demand has not yet picked up. “We have continued to see softening,” said one producer, and a number of colleagues echoed this perspective. “We do not see the high season in our orderbooks,” he added, referencing the seasonal uptick that typically appears in April.
Still, some welcomed the lack of volatility. “We are observing a normal market, one on the low side,” said a producer. “Order intake is slowing down but it is definitely not bad. We actually had a marvelous first quarter which was above budget. It could be a partial bounce back from Q4 2022. It feels like a normal year before 2020,” he added.
The Segezha Packaging Company is sold
Sack kraft players wondering about the fate of Segezha Packaging, which was unable to import paper from Russia to its European converting facilities, found out that the company had been sold by Segezha Group, likely to a Luxembourgish firm called Advanced Industries Group.
Some posited that the assumed new Luxembourgish ownership, which will presumably allow the plants to acquire paper from the European market, will tighten the market, as prior to the Russian invasion of Ukraine, Segezha Packaging acquired the majority of its paper from its Russian parent company. After the war began, a number of European producers refused to sell to them due to their Russian ownership.
Others thought that the sale would not have a major impact on the broader market as the sanctions have already been in place for a while and the impact of Segezha’s shifting procurement methods would have been felt not long after they were first put into effect.