The pandemic-fueled online retail boom has provided a demand boost for boxmakers, but it’s also squeezing margins as recyclable packaging from vendors like Amazon Inc. can’t be collected quickly enough, pushing up costs.
It’s the “dark side of e-commerce,” according to Bank of America, which says the huge demand for boxes is also causing collection issues, spurring higher recycled-paper costs for companies. The price of old corrugated cases, known as OCC, is now almost double the 2020 average, according to analyst Alexander Berglund, who lowered recommendations on Smurfit Kappa Group Plc and DS Smith Plc to neutral from buy this week.
Smurfit confirmed the squeeze in its full-year results statement Wednesday, as the margin on earnings before interest, taxes, depreciation and amortization narrowed to 17.7 per cent of sales from 18.2 per cent in 2019, with the cost of recovered fiber jumping “rapidly” in the second half. The stock rose as much as 4.5 per cent, however, as analysts focused on better volume and a potential increase in box prices.
Smurfit and DS Smith depend on OCC, which is converted into recycled containerboard and glued together to make boxes. The alternative to this recycling system is the “virgin stream,” where containerboard is produced from from wood, Berglund said.
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