FTSE 350 Review: Packagers boxed in on price

Demand for cardboard boxes is waning. In December, DS Smith reported a 3 per cent fall in box volumes, and the latest we’ve heard from Smurfit Kappa is that volumes are flat. This isn’t surprising. Online shopping has slowed down since the height of the pandemic, and the cost of living crunch has also hit fast-moving consumer goods (FMCG).

However, FTSE 100 packagers are still reporting record profits and upgrading their guidance. This is largely a result of price hikes. In the six months to 31 October 2022, DS Smith banked an extra £950mn by raising its prices.

But can this really continue? The market was pessimistic about packaging companies for much of 2022. However, they have continually defied the gloom, and some analysts believe shares are ripe for a re-rating if conviction in 2023 earnings delivery builds. It could also be a good time to buy as shares are fairly cheap by historical standards. 

Now for the bad news. If consensus forecasts are to be believed, packagers are at peak profitability; things are expected to go downhill in 2023 and into 2024. Softening demand, together with falling paper and energy costs, are expected to drive down prices. “With supply ahead of demand, we see lower industry returns with prices declining to cash cost support levels,” analysts at Jefferies predict. 

There are upsides to lower costs, of course. Jefferies analysts argue that “cost relief benefits will be seen before any potentially lower box prices, which are stickier on the way down” (they estimate there’s a three to six-month lag). In the short term, therefore, packagers might continue to pleasantly surprise us.