Does the Smurfit WestRock merger signify a trend for global packaging markets?

Weak demand, global oversupply and the saturation of domestic consolidation has shifted focus to international mergers for large packaging producers

On September 12, WestRock and Smurfit Kappa announced the signing of a definitive merger agreement. This followed the news that a merger to combine the second-largest containerboard producer in North America with the largest containerboard producer in Europe was under discussion earlier in September. In our view, this deal will bring important changes to paper packaging markets throughout the Americas and solidifies international consolidation as a major supply trend for global packaging.

Smurfit WestRock will have a containerboard market share of 6%

Although it is tempting to view the combination of two large packaging suppliers as a significant increase in global market concentration, the combined company, Smurfit WestRock, will have a global containerboard market share of just over the 6% range. For comparison, the global market shares of leading pulp producers are 9-12% for the very largest softwood kraft pulp producers and up to 29% for the top hardwood kraft producers. WestRock’s mills are mostly concentrated in North America, while Smurfit Kappa’s mills are mostly concentrated in Europe and neither company’s share of paper packaging mill capacity would change significantly in their main home markets.

Nonetheless, the prospect of cross-border ties offers significant advantages, which can partly be seen in each company’s already diverse portfolio of paper packaging offerings. WestRock is only the second-largest paper containerboard and corrugated producer in North America, but it was the largest producer of paper packaging overall in 2022 because it was also the second-largest boxboard producer and the clear leader in kraft papers. (Once the containerboard closures announced by WestRock are fully carried out, we project that its North American packaging capacity footprint will fall just below that of International Paper.) Though Smurfit Kappa has a much smaller position outside of containerboard in Europe, it produces containerboard, boxboard and kraft papers. The wide range of substrates and converting capabilities offered by WestRock is marketed as a major selling point for its North American customers and the ability of the combined company to offer such flexibility internationally may enhance its appeal to international buyers such as global consumer packaging companies.

Smurfit Kappa brings one North American containerboard mill and several corrugating facilities, with containerboard capacity mostly matched to the estimated appetite of its corrugating plants. Thus, the extent to which Smurfit WestRock will increase its vertical integration within the US via the merger is somewhat limited. WestRock is long on containerboard in the US and Canada, as we estimate that WestRock’s containerboard capacity (net announced closures at Panama City, Saint Paul, North Charleston and Tacoma) is approximately 1.4 million tonnes, or 23%, higher than its corrugating facilities’ appetite for containerboard.

WestRock, including all of the assets acquired when it purchased Grupo Gondi, is also long on containerboard in Mexico, with total containerboard capacity of about 800,000 tonnes versus an estimated appetite at box plants of approximately 500,000 tonnes. Smurfit Kappa, on the other hand, is short enough on containerboard that the two companies’ combined Mexican operations would still result in net purchases of containerboard, so Mexico represents a much more substantial opportunity to increase vertical integration within geographical North America. We view this as a highly attractive investment direction in the current market environment of sluggish demand, especially since it would also reduce exposure to more volatile, less lucrative export markets.

The combination of assets will give Smurfit WestRock an estimated Mexican market share of 36%. Thus, the Mexican market has the potential to present some of the most significant obstacles to the merger in the form of forced divestments, though any concentration in the Mexican industry is greatly offset by the fact that about one-quarter of containerboard demand is supplied by imports.

Merger could facilitate technological advancements in paper-making

Advantages of a combination are not necessarily limited to consolidating market share or increasing vertical integration. A transatlantic partnership may enable the spread of best practices and technological advancements. The European industry, for example, has traditionally been a leader in paper-making innovations and is well ahead of the North American curve in shifts to lighter-weight board. WestRock has numerous facilities in North America, while Smurfit Kappa serves markets throughout Europe and has footprints in some Latin American locations that WestRock does not.

A combined company could open up new distribution networks for each company’s products, enhancing its ability to cross-sell or offer consolidated sourcing to buyers that operate on a global basis. There are likely many synergies and efficiencies available for Smurfit WestRock to explore, but unlocking the full potential of the merger will depend a great deal on how successfully the companies can combine and leverage the best of their respective cultures — a complex task given the operating and geographic scope of the entities involved.

The consolidation of packaging producers has become a trend

Even the mere discussion of a merger between WestRock and Smurfit Kappa represented, in our view, the crystallization of what has been an emerging trend for international consolidation, especially since speculation has now been realized with a signed agreement. Already in North America, producers with major international footprints have acquired US companies that have subsequently moved into US packaging markets, with Paper Excellence’s acquisition of Domtar, Nine Dragons’ purchase of Catalyst Paper’s US operations and Billerud’s acquisition of Verso being recent major examples. WestRock’s acquisition of Grupo Gondi is also a step in this direction and WestRock has frequently highlighted the contributions of its Brazilian operations.

One reason that international consolidation may continue as an important trend in packaging markets is that increasing market concentration – and the accompanying scrutiny – means that acquisitions as an avenue for further domestic consolidation have probably run their course in many markets, especially the US. Extremely weak demand and global oversupply have shifted the focus of producers’ strategies away from capacity expansion and we expect investments to instead aim toward increasing vertical integration, lowering costs, penetrating new markets and increasing technical capabilities. If execution matches potential, international partnerships can unlock efficiencies and synergies that support the attainment of some of these goals.

This article was taken from PPI Pulp & Paper Week, our newsletter for pulp, paper and packaging market news and prices for North America. Speak to our team to learn more about our news and market analysis, prices, forecast and more.

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