The Investment column: Paper prices cut Smurfit profits

Jefferson Smurfit, the world's biggest manufacturer of linerboard for packaging, is something of a bellwether for the Western world's economies. Its materials and boxes are central to the shipping of products as diverse as fruit and vegetables, car parts and washing machines around the world. As trade grows, so does demand for Smurfit's products. The problem is that Smurfit is also completely dependent on the paper cycle, which has been vicious over the past 18 months. From $530 a ton at the end of 1995, US prices of kraft liner, a key grade, have slumped to $280.

So there was little surprise yesterday when Ireland's biggest industrial company announced profits slashed by 52 per cent to Irpounds 201m for 1996. Even so, Smurfit remains determinedly optimistic.

Although Dermot Smurfit, deputy chairman, was warning yesterday that 1997 would be another difficult year, he expects that a tightening of capacity later this year will ensure that 1998 should see the start of a sustained upturn for the industry. Support for this view comes from the recent performance of prices in Europe, which in the last few months have recovered half the pounds 60 a tonne fall recorded since the peak last year. Mr Smurfit also takes comfort from the reported decision by International Paper, the big US producer, to buy capacity rather than build it.

But there lies the crux of the problem for Smurfit. While the group has made a mantra of its renunciation of new-build capacity, others have proved more susceptible to the temptation to rush out and start building at the first sign of higher prices. The company itself points out that the 5.9 billion tons of capacity put on by the industry in the last three years is around double that likely to be used by "normal" demand growth. That adds up to a substantial overhang, even before taking account of the estimated 3.5 per cent or so additional plant expected to come on stream this year.

Even if the rest of the industry were to renounce its fixation with investment, Smurfit also has to contend with the uncertain outlook for continental economies, now the biggest part of the business since the pounds 640m takeover of Cellulose du Pin of France in 1994.

That said, Smurfit remains a quality company in an uncertain sector. This year should see it hack out another pounds 30m in cost savings, while good cash flow, admittedly assisted by favourable currency movements, has cut gearing to 34 per cent.

That strength is likely to be used for bolt-ons in places like Germany and developing markets, rather than mopping up the outstanding 53.5 per cent in Jefferson Smurfit Corporation, despite the apparent eagerness of Morgan Stanley to sell its 36 per cent stake. Profits of Irpounds 135m would put the shares, down 4p at 155.5p, on a forward p/e of 19. High enough, even with non-Irish investors holding one-third of the equity.

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

The 161-page dossier that exposes Fifa's dark heart

How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

Exclusive interview with Tripoli PM Khalifa al-Ghweil

'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

Raymond Chandler's Los Angeles

How the author foretold the Californian water crisis
Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

Art attack

Chinese artist who posted funny image of President Xi Jinping facing five years in prison
Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

Cher is the new face of Marc Jacobs

Alexander Fury explains why designers are turning to august stars to front their lines
Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

'I'm climbing Ben Nevis for my daughter'

Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
10 best wedding gift ideas

It's that time of year again... 10 best wedding gift ideas

Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
Paul Scholes column: With the Premier League over for another year, here are my end of season awards

Paul Scholes column

With the Premier League over for another year, here are my end of season awards
Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

Liverpool have seen too much tragedy to forget Heysel

Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

Khan’s audition for Mayweather may turn into a no-win situation

The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor