Paper Jam: Coronavirus's Impact on Paper Packaging
The outbreak of coronavirus (designated as Covid-19 by the WHO) has impacted the paper packaging industry in terms of reduced inventory and supply of paper board, logistics interruptions, an absent workforce, as well as increased costs. However, we also see some potential opportunities emerging for paper packaging in the future.
Domestic Supply-Side Disruptions
Coronavirus emerged from Hubei Province in late December and spread rapidly across China. Most factories closed for an extended Lunar New Year holiday, due to the escalating outbreak, and planned to reopen on February 10, 2020, a week later than scheduled. However, it is difficult for factories to quickly return to full production, given that quarantines and other measures that have been implemented affect factory workers returning from their hometowns.
According to SCI99, the operation rate of paper mills was lower than 5% on February 3, 2020, and there is still a lot of uncertainty for the remaining factories that expect to reopen during the weeks of February 10 and February 17 (see Figure 1). As an important hub linking upstream raw materials and downstream converters, paper mills can block the entire supply chain of the paper packaging industry. The absent workforce and logistics interruptions caused an overstock of pulp at ports, a shortage of recycled paper for upstream supplies, and a massive shortage of paperboard for converters.
Figure 1: Resumption of work in paper mills in China
Source: SCI99, Rabobank 2020
We expect that the price of containerboard and corrugated boxes will rise correspondingly, due to the increasing costs of labor and raw materials in the coming months. Meanwhile, the impact of the coronavirus outbreak on paper mills of different sizes is varied. Small and medium-sized paper mills and converters will be under greater pressure from rising costs and finances, and many of them could be forced out of the market, accelerating the ongoing consolidation trends in China.
Domestic Demand Shocks Bring Opportunities
Corrugated Boxes Benefit From Surging Demand From Express Delivery and E-Commerce
Normally, the Lunar New Year holiday is the off-peak season for express delivery sales. However, due to the impact of the outbreak, consumers are avoiding going out, shifting offline demand for food, beverages, and medical supplies to online. This change in consumer purchasing behavior strongly increases the volume of express deliveries, which directly drives an increase in the use of corrugated boxes for transport. A large amount of medical supplies was transported to Hubei Province and led to a surge in express package volumes. According to statistics by China Post, 78.2m parcels were delivered from January 24 to January 29, which represents an increase of 110.3% year on year. However, a large share of parcels ordered online have not yet been dispatched due to the fact that 80% of the express delivery firms delayed resumption of work. This situation should gradually ease with the return of express delivery workers in mid-February.
In the long run, we reckon that the constraints resulting from the coronavirus outbreak will cultivate new consumer habits, which will promote a further penetration of the e-commerce platform into the market. Consequently, consumers who did not previously purchase online will start shopping online, while regular users might increase their online buying frequency. This will subsequently lead to growth momentum for corrugated box producers. Based on the rising use of corrugated boxes in express parcels, as counted by China Post, we estimate the total volume of corrugated boxes used in express parcels could reach 40.7bn units in 2020. If we take China’s latest plastic ban policy into account, we reckon the total amount of corrugated boxes might reach around 72.2bn units in 2022 at a robust CAGR 2019-2022 of 31.8% (see Figure 2).
Figure 2: Total volume of corrugated boxes in express delivery, 2017-2022f
Source: China Post, Rabobank 2020
Folding Cartons Gain Momentum in Foodservice and Retail
In response to the coronavirus outbreak, most foodservice operators, like Starbucks, McDonald’s, Yum China, and Haidilao Hot Pot, have temporarily closed some or most of their stores in China. Compared to foodservice, retail sales of daily groceries are relatively resilient to the virus outbreak. Retail sales of staple food categories like frozen foods, ready meals, instant noodles, and baked goods may even benefit from consumers ‘panic stocking,’ which has directly promoted increased use of folding cartons.
At the same time, food delivery platforms have responded at an amazing speed by launching contactless delivery services, allowing consumers to pick up their orders in a designated area without interacting with the delivery rider in person. Some coffee shops and fast food stores, like Luckin Coffee and Domino's Pizza, also encouraged consumers to order online in advance and pick up their orders in-store to avoid queues. The adoption of paper disposables is likely to gain traction due to the (temporary) rise in demand in food delivery and takeaway, which, in turn, also drives additional utilization of folding cartons.
Implications for Paper Packaging
2020 could be a tough year for most paper manufacturing facilities, due to the constraints that they are facing. In the short to medium term, we expect the paper packaging industry to experience an imbalance between supply and demand. At the same time, there are lots of opportunities:
1. Coronavirus will help accelerate the consolidation of the paper packaging industry. Small firms are being phased out at an accelerating pace, while larger firms are acquiring a larger share of the market through M&A or building new capacity.
2. Consumer awareness of hygiene and safety will further improve, which will lead to increasing demand for safe food packaging. More paper packaging is likely to replace plastic packaging, especially in food sectors.
3. The recent change in consumers’ shopping habits may lead to more online sales in the long term. Paper packaging companies should take this opportunity to invest more in packaging design, R&D, and production practices adapted to e-commerce to achieve higher utilization rates.
Where to go from here
Stacie WanAnalyst – Supply Chains and Beverages