Smurfit Kappa’s shares remain down 16% since the start of the year
Smurfit Kappa’s shares remain down 16% since the start of the year © Bloomberg

You do not need to be an eight-year-old to reimagine a cardboard box as a rocket ship. Investors also see these ubiquitous brown objects as a source of uplift, via the shares of Smurfit Kappa. The Irish paper and packaging maker said volumes in the second quarter fell just 2 per cent in a trading update this week. This better-than-expected performance - and payment of last year’s promised dividend - briefly sent shares up 4 per cent.

Packaging demand is inextricably linked to economic conditions. The pandemic means weaker volumes and lower earnings. Share prices across the sector have reacted accordingly; Smurfit Kappa’s remain down 16 per cent since the start of the year. The decline is less severe than for UK rivals DS Smith and Mondi. Justifiably so.

The sector has been struggling with oversupply and falling prices for raw materials since China banned waste imports in 2018. The pandemic brings that problem back to the fore. A collapse in advertising and demand for print paper is pushing manufacturers into coarser packaging-grade papers. Prices for these are close to smaller manufacturers’ cash costs of production, thinks Jefferies. Additional oversupply will mean lower prices for longer.

That should allow larger integrated manufacturers to gain market share. Smurfit Kappa’s second-quarter volumes testify to that. Food and consumer goods represent about 70 per cent of demand, helping explain the better performance.

DS Smith shares are down about 30 per cent this year on fears it overpaid for recent acquisitions. Mondi’s weaker performance reflects its exposure to demand from offices. These have mostly stood empty since April.

Recycling is the biggest opportunity for manufacturers. An EU tax on non-recyclable plastics due in January exemplifies the shift. Innovation is an associated card packaging businesses are fond of playing. Smurfit Kappa has launched products such as TopClip, a cardboard carrier that replaces plastic yokes on beer six packs. But for all its innovation and its linkage to surging online deliveries, packaging remains a cyclical commodity business.

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