Mondi (MNDI) shares were initially marked down after a trading update revealed that softening demand and an unfavourable pricing environment would reduce the paper and packaging specialist’s third quarter underlying cash profits by nearly a fifth, compared with the same period last year.
The company cited “lower average selling prices from the highs reached towards the end of 2018 and into early 2019”. This relative decline, along with the anticipated lower forestry fair value gain, “more than offset the benefits of our ongoing profit improvement initiatives”, Mondi added.
Prices for Mondi’s key paper grades were below those of the first half. Uncoated fine paper prices were lower, with “significantly lower pulp selling prices”. Mondi began price reductions in selected kraft paper grades at the start of the quarter, which saw demand bolstered by the drive to replace plastic bags. Here, pricing remained above 2018 levels.
There was better news in fibre packaging, which showed signs of stabilising, after the company witnessed “sharp price erosion” over the first half of the year. “While average benchmark European containerboard selling prices were lower than the previous quarter and significantly lower than the comparable prior year period, the price movement during the period was limited,” Mondi said.
One city analyst highlighted market concerns over containerboard oversupply and the softening of demand. Prices are 20 per cent down on their 2018 peaks, he said.
"This has led to an earnings downgrade across the sector," he added, "because ultimately you are getting less for your paper, and... you need to pass on some of your lower paper prices".
Lower industrial bags and uncoated fine paper volumes drove like-for-like sales volumes down, but this was partly offset by growth in corrugated packaging. Mondi expects underlying cash profits to sit 18 per cent lower than last year’s comparable period. Scheduled mill maintenance shutdowns hit underlying cash profits by around €40m (£36m). The full-year impact of these shutdowns is expected to come in around €150m.
The impact of the trading update was felt across the sector, evidenced by concurrent share price falls for both Smurfit Kappa (SKG) and DS Smith (SMDS).
In a recent trading update, DS Smith chief executive Miles Roberts observed "volatility in the macroeconomic environment and input costs". He emphasised the packaging group's focus on pricing discipline and efficiency improvements.
