The Big Ones Have Come
Expert Severo-Zapad ¹26(374) — 30 june —
Large players are coming to the Northwest corrugated box market, which will inevitably lead to its consolidation.
Ilim Group, a Russian-American forestry holding, has launched a corrugated box plant in the town of Kommunar, Leningrad Oblast. The company spent RUR 1 billion for construction of this plant with a productive capacity of 140 million m2 of packaging per year. The production site is intended to become the final link in the processing chain: corrugated board for packaging production will be delivered from the Koryazhma Branch of Ilim Group.
The Kommunar plant is the first manufacturing location of such capacity in the Northwest of Russia (previously the largest one was Smurfit Kappa with an annual output of approximately 100 million m2). Ilim intends to build four other plants of similar productive capacity within five years, not ruling out the option of buying out plants in the relevant sector. The Company's management has not yet made public the exact locations of the future facilities, noting, however, that they will be in the European part of Russia.
«Corrugated box business is an important area of Company development», says Mr. Paul Herbert, Chief Executive Officer of Ilim Group. «Corrugated box market is currently experiencing a great demand for new production capacities, chiefly local plants. We want to be as receptive to market demand as possible and become the most efficient market player.»
Closer to the Market
Ilim is not the only company paying close attention to the corrugated box market. Stora Enso Packaging VR of Finland has launched a plant with an annual capacity of 150 million m2 in Lukhovitsy, Moscow Oblast, almost simultaneously with Ilim and announced its intention to increase the capacity of its second plant in Balabanovo by the end of the year. GOTEK, Russia's largest packaging manufacturer, is constructing a production facility with an annual output of 180 million m2 in the Vsevolozhsk district of the Leningrad Oblast. While new plants are only starting to emerge in the Northwest Federal District, the Central FD can already boast half a dozen of them. The reason is that the Central District is the leader in corrugated box consumption (47%), whereas Northwest only accounts for 10%. Dynamics of the market, which has been growing, on average, by 10% per annum since the late 1990s, makes it increasingly attractive. The key consumer is the rapidly developing food industry which purchases up to 80% of corrugated packaging materials. A significantly smaller proportion — approximately 5% — is consumed by the chemical industry and household appliances and synthetic detergents manufacturers.
According to market insiders, even though half of the Russian board is manufactured in the Northwest Federal District, local production has not yet been able to satisfy the demand for corrugated packaging materials. Small manufacturers who still account for up to 65% of the corrugated box market were not always able to meet the increasing product quality requirements. Subsequently, some packaging materials had to be delivered from other regions and even from abroad, although the haul distance should not exceed 500 km. The decision of the large forestry companies to build corrugated box plants in close proximity to major consumers (primarily in the Central, Volga and Northwest Federal Districts) seems rather logical.
Supplanting The «Little Ones»
The investors' plans are rather ambitious. For example, Ilim Group's management claim that in a few years they will be able to take over a 25% market share in the European part of Russia. Other market players are also determined to significantly increase there shares. It is clear that it will be the small manufacturers who will have to «make room». Small corrugated box plants are currently retaining their share mostly by means of dumping. However, vertically integrated companies will be able to compete with them in price terms. Availability of own raw materials for corrugated box production will enable them to, first, become independent from board suppliers and, second, reduce production costs. By the way, Ilim Group and Arkhangelsk PPM are the only two companies in the Northwest who have their own source of raw materials required to produce corrugated boxes.
In addition, the cutting-edge western equipment purchased by the major holdings for their plants will enable them to compete with the «little players» in terms of product range and quality. «One shouldn't be worried about excessive supply in the market, since there is such an acute shortage of high-quality packaging now,» says Tatiana Goncharenko, Marketing Manager of Ilim Gofroupakovka, «Customers have become much more demanding and will prefer quality packaging materials to cheaper ones.» In the experts' opinion, small and medium corrugated box manufacturers will either have to leave the market or find their own niche and will be working with the enterprises which will be willing to buy cheaper products of poorer quality.
«There is a clear tendency towards creating vertically integrated holding companies all across the forestry sector. Corrugated packaging sector is not an exception here. Company and market consolidation will be accomplished through acquisitions of smaller manufacturers by the larger market players,» says Anastasia Kopylova, Analyst of Lesprom Industry Consulting.