Wave of M&A starting as containerboard producers struggle with weak demand

After two difficult years, we anticipate demand for containerboard and corrugated board in Europe will start to recover this year. However, sluggish growth in the European economy will likely continue to be sluggish and consumer spending remains uncertain in the near term. Challenges will increase as containerboard capacity grows faster than demand during the next couple of years in a market that is already struggling with 5 million tonnes of overcapacity. Therefore, operating rates will likely remain at record-low levels for a longer period, putting pressure on producers. How will corrugated and containerboard producers be able to grow their business in the near future?

Want more insight into the containerboard market? Learn how Fastmarkets’ short-term and long-term forecasts for the European paper packaging industry can help your business. Talk to us today.

Companies could improve their profitability by closing containerboard capacity, but this could reduce their future growth potential and market share. The volume of closures needed to raise operating rates back to their long-term average of 92% in Europe is huge. So, corrugated board and containerboard producers also need to find other options to improve their competitiveness. Vertical integration through mergers and acquisitions (M&A) could be one method to employ to strengthen operations.

Recently, we have heard news of a possible merger of Smurfit Kappa Group and WestRock. This deal would create a globally integrated company that might fare better over economical cycles than non-integrated businesses. The deal is unusual because integration has taken place between local containerboard and corrugated board producers on the same continent. And now, according to recent news, another mega-merger might take place between DS Smith and Mondi. What kind of benefits could these companies see in their corrugated board and containerboard operations with this deal? Could these actions be just the start of a wave of M&A that could consolidate the corrugated and containerboard market in Europe?

Location of corrugated board and containerboard capacity for DS Smith and Mondi

DS Smith is currently the second-largest containerboard producer in Europe. The company has a total containerboard capacity of 4.1 million tonnes and focuses on recycled containerboard production with a small amount of virgin containerboard and other packaging grades. About 87% of its capacity is located in Europe. with the rest in North America. The company’s corrugated board plants have an estimated capacity of more than 9 billion m², of which about 93% are in Europe and the rest in North America. Its European assets are located across the continent, but the majority are in Western, Central, and Southern Europe.

We estimate DS Smith buys more than 600,000 tonnes of containerboard on the open market since its own containerboard production is not enough to supply its corrugated board plants. Of that 600,000 tonnes, about 400,000 tonnes is virgin containerboard and the rest is recycled containerboard. As a result, the company’s investment plans to increase its containerboard capacity in Italy and Portugal make sense. However, even after that, the company could operate its containerboard mills at maximum capacity with the assumption of prioritizing internal production but would still be short on virgin containerboard.

Mondi is currently the fifth-largest containerboard producer in Europe and has a total containerboard capacity of 2.6 million tonnes, of which 90% is in Europe and the rest is in Africa. All of the company’s estimated 2 billion m² corrugated assets are located in Europe. Mondi is also a major producer in other paper and packaging grades since it has a capacity of more than 4 million tonnes of kraft papers, pulp, graphic papers and specialty papers. Its facilities are mostly located in Emerging Europe.

We estimate Mondi has just enough recycled containerboard capacity to satisfy its corrugated board plants. Meanwhile, the company has an estimated 1.5 million tonnes of excess virgin containerboard capacity. The company can only utilize about 45% of its containerboard internally at its corrugated board plants. Integration with a corrugated board producer who is short on virgin containerboard would benefit Mondi and likely improve its operating rates and profitability.

Price of M&A might be too high for the benefits

Since vertical integration increases operational efficiency, it is obvious why containerboard producers are seeking corrugated board assets; increased integration improves their profitability significantly and could, at the same time, push some high-cost producers out of the market. Corrugated board producers could also see cost and synergy benefits from mergers and acquisitions; however, they should see a similar demand recovery in the near term regardless of their ownership. As a result, it is not necessary for them to search for mergers and acquisitions as the cost structure will likely remain stable; we expect containerboard supply to remain abundant and affordable in the near term.

Containerboard producers can leverage Fastmarkets’ market-reflective price data and forecasts to capitalize on the opportunities from potential mergers. By staying informed on industry trends and pricing dynamics, producers can make strategic decisions to enhance operational efficiency, optimize profitability, and adapt to changing demands effectively in the dynamic containerboard market landscape. Speak to our team today.