Global Corrugated Forecast 2012-2016

Global Corrugated Forecast2012-2016

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PRIVATE AND CONFIDENTIAL

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TABLE OF CONTENTS

INTRODUCTION 4

1 EXECUTIVE SUMMARY 1.1 Global, Economic and Business Prospects 5

1.2 Comparisons Between Corrugated Production and Overall Levels of Industrial Production

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1.3 Key Factors Influencing Demand For Corrugated 6 1.4 Changing Corrugated Specifications 7 1.5 Summary Forecasts of Global Corrugated Demand 7 1.6 Assessment of Downside Risks and Upside Gains 8 1.7 Global Shifts in Business Migration 8 1.8 Changing Pattern of End Use Demand 8

2 OVERVIEW OF GLOBAL CORRUGATED PROSPECTS 10

2.1 Global, Economic and Business Prospects 10 2.1.1 GDP Forecasts 10 2.1.2 Industrial Production Forecasts 13 2.1.3 Downside Risks and Upside Gains to Economic Forecasts 16

2.2 Comparisons Between Corrugated Production and Overall Levels of Industrial Production

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2.3 Key Factors Influencing Demand For Corrugated 20 2.3.1 Economic and Political Issues 20 2.3.2 Changing Inventory Levels 20 2.3.3 Packaging Reduction 21

2.3.4 Retail Developments and the Adoption of Retail Ready Packaging (RRP)

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2.3.5 Transit Outer Substitution Trends 23 2.4 Changing Corrugated Specifications 23 2.4.1 Container Constructions 23 2.4.2 Wall Constructions and Flute Formations 24 2.4.3 Substance Weight Reductions 24 2.4.4 Print and Decorative Processes 25 2.5 Summary Forecasts of Global Corrugated Demand 26 2.5.1 Forecasts by Area 26 2.5.2 Comparisons Between Previous and Current Forecasts 33 2.5.3 Per Capita Corrugated Production 35 2.5.4 Average Substance Weights 36 2.5.5 Forecasts By Weight 37 2.6 Assessment of Downside Risks and Upside Gains 38 2.6.1 Economic Issues 38 2.6.2 Political Issues 39 2.6.3 Monetary Issues 39 2.6.4 Vagaries of the Weather 40 2.6.5 Changing Inventory Levels 40 2.6.6 Packaging Reduction 40 2.6.7 Transit Outer Substitution 40 2.6.8 Summary of Downside and Upside Forecasts 41 2.7 Global Shifts in Business Migration 43 2.8 Changing Pattern of End Use Demand 45

3 GLOBAL BUSINESS MIGRATION FORECASTS 48 3.1 Global Summary 49 3.2 North America 50 3.3 Europe 50


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3.4 Pacific Rim 51 3.5 China 51 3.6 Rest of Asia 52 3.7 Central and South America 52 3.8 Other Regions 53

4 GLOBAL MARKET PROSPECTS 54 4.1 Introduction 55 4.2 Summary of Global Market Prospects 55 4.3 Processed Foods 56 4.3.1 Processed Foods – Global Summary 56 4.3.2 Processed Foods – North America 58 4.3.3 Processed Foods – Europe 58 4.3.4 Processed Foods – Pacific Rim 59 4.3.5 Processed Foods – China 60 4.3.6 Processed Foods – Rest of Asia 60 4.3.7 Processed Foods – Central and South America 61 4.3.8 Processed Foods – Other Regions 61 4.4 Drinks 62 4.4.1 Drinks – Global Summary 62 4.4.2 Drinks – North America 63 4.4.3 Drinks – Europe 64 4.4.4 Drinks – Pacific Rim 65 4.4.5 Drinks – China 65 4.4.6 Drinks – Rest of Asia 66 4.4.7 Drinks – Central and South America 66 4.4.8 Drinks – Other Regions 67 4.5 Non Food Consumables 68 4.5.1 Non Food Consumables – Global Summary 68 4.5.2 Non Food Consumables – North America 69 4.5.3 Non Food Consumables – Europe 70 4.5.4 Non Food Consumables – Pacific Rim 70 4.5.5 Non Food Consumables – China 71 4.5.6 Non Food Consumables – Rest of Asia 72 4.5.7 Non Food Consumables – Central and South America 72 4.5.8 Non Food Consumables – Other Regions 73 4.6 Fresh Foods 74 4.6.1 Fresh Foods – Global Summary 74 4.6.2 Fresh Foods – North America 75 4.6.3 Fresh Foods – Europe 76 4.6.4 Fresh Foods – Pacific Rim 76 4.6.5 Fresh Foods – China 77 4.6.6 Fresh Foods – Rest of Asia 77 4.6.7 Fresh Foods – Central and South America 77 4.6.8 Fresh Foods – Other Regions 78 4.7 Domestic Appliances and Electrical Goods 79 4.7.1 Domestic Appliances and Electrical Goods – Global Summary 79 4.7.2 Domestic Appliances and Electrical Goods – North America 80 4.7.3 Domestic Appliances and Electrical Goods – Europe 81 4.7.4 Domestic Appliances and Electrical Goods – Pacific Rim 82 4.7.5 Domestic Appliances and Electrical Goods – China 83 4.7.6 Domestic Appliances and Electrical Goods – Rest of Asia 83

4.7.7 Domestic Appliances and Electrical Goods – Central and South America

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4.7.8 Domestic Appliances and Electrical Goods – Other Regions 85


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4.8 Durable Goods and Clothing 85 4.8.1 Durable Goods and Clothing – Global Summary 85 4.8.2 Durable Goods and Clothing – North America 87 4.8.3 Durable Goods and Clothing – Europe 87 4.8.4 Durable Goods and Clothing – Pacific Rim 88 4.8.5 Durable Goods and Clothing – China 88 4.8.6 Durable Goods and Clothing – Rest of Asia 88 4.8.7 Durable Goods and Clothing – Central and South America 89 4.8.8 Durable Goods and Clothing – Other Regions 89 4.9 Industrial and Machinery 90 4.9.1 Industrial and Machinery – Global Summary 90 4.9.2 Industrial and Machinery – North America 91 4.9.3 Industrial and Machinery – Europe 92 4.9.4 Industrial and Machinery – Pacific Rim 92 4.9.5 Industrial and Machinery – China 93 4.9.6 Industrial and Machinery – Rest of Asia 93 4.9.7 Industrial and Machinery – Central and South America 94 4.9.8 Industrial and Machinery – Other Regions 94 4.10 Other Sectors 95 4.10.1 Other Sectors – Global Summary 95 4.10.2 Other Sectors – North America 96 4.10.3 Other Sectors – Europe 96 4.10.4 Other Sectors – Pacific Rim 97 4.10.5 Other Sectors – China 97 4.10.6 Other Sectors – Rest of Asia 98 4.10.7 Other Sectors – Central and South America 98 4.10.8 Other Sectors – Other Regions 98

APPENDIX 100


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INTRODUCTION

This report contains the 2012 to 2016 Global Corrugated Forecasts prepared for the International Corrugated Case Association (ICCA) by PRISM Ltd. It contains a brief Executive Summary and a Main Volume containing full supporting data, as well as a Statistical Appendix covering each of the main regions of the world, which is presented separately. The report compares and contrasts the current forecasts with those prepared in July, 2011, in addition to interim forecasts contained in the Mid-Year Review, prepared in July, 2012. The main objectives are:

To provide an economic overview for the main regions of the world that are used as a basis for global corrugated forecasts.

To prepare up-to-date forecasts of corrugated production in each region of the World, consistent with the regional categories adopted in the ICCA Worldwide Corrugated Packaging Industry Statistics Report.

To assess the short- to medium-term prospects for corrugated demand and to examine the key issues influencing corrugated demand in each region.

To establish the Global pattern of demand across the major end uses for corrugated, and to establish 5-year forecasts of the shifts in regional demand, taking due account of the migration of business from developed to under developed regions.

To highlight key trends in corrugated specifications.

Details of the research scope and method are contained in the Appendix to this main volume.


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1.1 Global, Economic and Business Prospects Forecasts of GDP contained in last year’s edition have been revised downward, reflecting the

slowdown in the major economies of the world: from 4.5% to 2.6% in 2012 and from 4.5% to 2.9% in 2013, resulting in a reduction from 4.5% p.a. to 3.3% p.a. for the 5-year period 2010 to 2015.

Forecasts of industrial production for 2012 and 2013 have been downgraded by a similar amount with the 5-year average growth reduced from 4.2% to 3.5% p.a. All regions have been downgraded with the exception of North America and corrugated has suffered from a sizeable shift away from manufacturing to infrastructure projects.

Downside vulnerabilities to these forecasts are:

A lack of resolution to the Euro debt crisis and continued recession there.

The prospects of excessive fiscal tightening in the U.S., widely referred to as the “fiscal cliff”.

Bleaker prospects for exports from emerging to developed regions, with potential for a hard landing in China.

The possibility of a sharp slow down or contraction in credit growth impacting still further on emergent markets.

Under the prevailing circumstances, it is difficult to see any potential upside gains to the global economic environment, although there is a possibility that prospects are viewed with undue pessimism, given the current low levels of business confidence.

(See sub-section 2.1 for further details)

1.2 Comparisons between Corrugated Production and

Overall Levels of Industrial Production The correlation between corrugated production and industrial production is becoming

increasingly tenuous and is influenced by:

Changes in the components for corrugated production.

Changes in the components for industrial production, with a reduction in the share held by manufacturing.

Pressure for packaging reduction arising out of an austere cost environment and in

response to more stringent environmental targets.

Reductions in inventories which are unlikely to recover to pre-crisis levels. As a result, while corrugated output moved well ahead of growth in industrial production for

the period 2006 to 2011, it will grow marginally less than overall levels of industrial production for the next 5 years.

There is a stark contrast in the comparisons when applied to each region of the world; for the

period 2011 to 2016:


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Industrial production in developed regions will grow by an overall 12% with corrugated growing by 7% .

Industrial production in emerging regions will grow by a substantial 45%, compared with corrugated at an overall 32%.

(See sub-section 2.2 for further details) 1.3 Key Factors Influencing Demand For Corrugated In addition to the economic issues noted in sub-section 1.2, a number of political issues are

influencing the future:

The U.S. election had the effect of putting commercial decisions on hold, but now that the outcome is known, uncertainties still exist, arising out of the Republicans’ continued control of Congress.

Political tensions exist between China and Japan over disputed island territories.

The risk of political instability in the Middle East remains; impacting on the price and availability of oil.

We conclude that these political factors are small, compared with the economic vulnerabilities outlined in sub-section 1.1. Current recessionary conditions, notably in Europe, are resulting in the need for downward adjustments to inventories. With the increasing sophistication of inventory management, including the growing importance of vendor-managed inventories, it is likely that stocks will not be recovered to normal pre-crisis levels. Changes to corrugated container specifications and the substitution of regular-slotted cases by open-top cases, die-cuts and trays, are creating some downward pressure on corrugated demand. These attempts at reducing the amount of transit outer packaging in use are being accompanied by changes to product formulations and primary packaging substitution, which will create further marginal downward pressure on corrugated volumes. There are a number of important retail developments impacting corrugated including: The continued growth in hypermarkets and supermarkets, notably in emergent regions.

A marked growth in the share held by hard discounters.

Growth in multiple convenience stores.

Swift emergence of internet shopping, notably in developed regions.

These issues are having an important influence on corrugated specifications, the most important involving the growing adoption of retail ready packaging (RRP). Few significant changes are evident in the substitution between corrugated and competitive transit outer materials and systems and the market share held by corrugated is expected to remain broadly unchanged.


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1.4 Changing Corrugated Specifications

The move towards smaller containers required for shelf ready packaging and the displacement of regular slotted cases by trays and die-cuts continues unabated, resulting in marginal reductions in corrugated volumes. There is a marked move from multi-wall to single-wall constructions in emergent markets, as the quality of containerboard improves, with continued investment in new containerboard machines. Micro-flute continues to offer well above average prospects, despite the introduction of intermediate flute formations between B- and E-flute. Substance weight reductions will result in a 5-year yield improvement of 4.1%, but in North America, the reduction in substance weights will be no more than 1.4%. Demand for decorative print is influenced by the need for improved visual appeal at the Point-of-Sale, with the growing adoption of Retail Ready Packaging (RRP). Decorative print processes account for 11% of total demand and will grow at roughly double the rate for corrugated as a whole. (See sub-section 2.4 for further details)

1.5 Summary Forecasts of Global Corrugated Demand Over the next 5 years, global corrugated demand will grow by an average 3.5% p.a., based

on area, well below the historic trend.

In 2009, China overtook the USA as the largest global producer, and now holds a 25% share of global corrugated output. China will contribute half of the incremental business forecast over the next 5 years and, by 2016, its share is expected to reach 28%. In the July 2011 report, we predicted that global corrugated production would grow by 5.4% in both 2012 and 2013. In the Mid-Year Review, prepared in July 2012, this forecast was downgraded to 3.2% in 2012 and 4.9% in 2013. Since then, there have been further downward revisions and our current forecasts are for growth of 2.3% in 2012 and 3.3% in 2013. For the period 2010 to 2015, these changes result in a reduction in the average growth rate from 5.4% p.a. to 3.3% p.a. and an average 3.5% p.a. for the period 2011 to 2016. Growth expressed in tonnage terms will average 2.6% p.a. as a result of continued reductions in average substance weights.



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1.6 Assessment of Downside Risks and Upside Gains

Economic/political issues, changing currency parities, the vagaries of the weather, changes in inventory levels, packaging reduction and transit outer substitution, all represent downside vulnerabilities or upside gains, dependent on their likely impact.

Our downside forecast is for growth averaging 2.1% p.a. over the next 5 years generating 23 billion square metres of additional business.

The upside forecast is for growth of 4.4% p.a. generating an incremental 49 billion square metres.

The most likely outcome is for growth of 3.5% p.a. yielding an extra 38 billion square metres. (See sub-section 2.6 for further details)

1.7 Global Shifts in Business Migration

There has been, and will continue to be, a steady move away from developed to emerging regions, resulting from changes in the import/export balance and the relocation of manufacturing and assembly facilities.

As a result, the developed regions of the world will see their share of the total corrugated market decline from the current level of 53% to 48% in 2016.

However, there is growing anecdotal evidence of moves in the opposite direction, as an examination of the real costs of “off-shoring” create some moves to “re-shoring”. As a result, the impact of future business migration on corrugated demand in developed regions of the world will be less than it has been in the past, and cost differentials between developed and emerging regions will continue to converge. (See sub-section 2.7 for further details)

1.8 Changing Pattern of End Use Demand

When viewed in a global context, little change is evident in the share held by each generic market sector, with FMCG markets holding a constant 44.3% share.

At a regional level, the differences are far more pronounced.

The emerging regions of the world will contribute 80% (30 billion square metres) of the 38 billion square metres forecast to be generated over the next 5 years, with the developed regions contributing only 20% (8 billion square metres).

In FMCG sectors, the emerging regions will contribute 74%, but, in industrial and durables markets, their contribution is an overwhelming 90%.



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2.1 Global, Economic and Business Prospects

2.1.1 GDP Forecasts

Global Summary

In response to the Eurozone recession and gloomier prospects for recovery in world trade, GDP forecasts have been revised downward yet again.

Our forecast for GDP growth this year of 2.6% is similar to that contained in our Mid Year Review, but our growth forecast for 2013 is slightly lower than that predicted in July, 2012. This reflects the slow down in the major economies of the world: US growth has been decelerating, although GDP recovered quite well in the third quarter of 2012; the Eurozone remains solidly in recession and the region’s prospects at best are getting worse more slowly; China, increasingly an engine of global growth, is taking longer than expected to benefit from recently policy stimuli and continues to suffer from depressed conditions in major export markets.

GLOBAL GDP TRENDS AND FORECASTS – 2006 TO 2016 % CHANGE ON PREVIOUS YEAR

Region 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

North America 2.8 2.0 -0.1 -3.6 2.7 2.0 2.3 2.2 2.9 3.3 3.3

Europe 3.8 3.6 0.7 -4.4 2.5 2.1 0.4 1.0 1.9 2.2 2.3

Pacific Rim 2.5 3.0 -0.4 -4.5 5.2 0.2 2.2 1.8 1.8 1.9 1.9

China 12.7 14.2 9.6 9.2 10.4 9.2 7.8 8.2 8.5 8.5 8.5

Rest of Asia 7.6 8.1 5.1 3.7 8.6 5.5 4.9 5.6 5.8 6.0 6.2

C & S America 4.8 6.4 5.2 -0.2 7.6 3.8 1.9 3.9 4.2 4.2 4.1

Other Regions na na na na na na na na na na na

World 5.2 5.4 2.8 -0.6 5.1 3.9 2.6 2.9 3.5 3.8 3.9

Source: IMF WEO; World Bank


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GLOBAL GDP TRENDS AND FORECASTS – 2006 TO 2016 % CHANGE ON PREVIOUS YEAR

The following chart shows the extent of the downgrading of these forecasts, by comparing GDP forecasts contained in last year’s Main Volume, prepared in July 2011, the interim forecasts contained in the Mid Year Review, prepared in July 2012, and our current forecasts.

COMPARISON OF GLOBAL GDP FORECASTS PREVIOUS, MID YEAR REVIEW AND CURRENT FORECASTS – 2011 TO 2016

% CHANGE ON PREVIOUS YEAR

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Previous ForecastMid Year ReviewRevised Forecast


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Developed Economies

In the USA, the US Federal Reserve has recently announced a third programme of quantitative easing, to remain in place until job outlook recovers, following soft jobs data emerging in the summer. This “QE3” is expected to boost asset prices and encourage consumer spending. The economic outlook has improved in recent months, with GDP up by 2.0% in the third quarter of 2012, compared with 1.3% in the second quarter. This was largely a result of an increase in federal government spending of 9.6%, an increase of personal expenditure of 2.0% and a downturn in imports of -0.2%. In Europe, the European Central Bank’s (ECBN) announcement to buy government bonds in potentially unlimited quantities, via Outright Monetary Transactions (OMTs), and to do “whatever it takes” reduced the risk of contagion, whilst the recent German constitutional court’s favourable ruling on the Eurozone’s bail out fund helped to calm nerves. Since then, however, the governments of Germany, the Netherlands and Finland have appeared to renege on this agreement to recapitalise banks directly, effectively by-passing governments. This has unsettled investors’ nerves yet again. More austerity measures have been announced in Spain and France, but the targets will be difficult to achieve in the deteriorating economic climate. A longer-term solution involving more fiscal union remains a long way off and such an agreement may exclude peripheral countries such as Greece. The outlook in Japan is somewhat brighter where reconstruction spending is having a more pronounced effect than previously expected.

Emerging Economies

The recession in Europe and sluggish demand in the US has hit the developing world. In China, the economic juggernaut is losing momentum, with GDP slowing month by month. GDP rose by 7.4% in Quarter 3 following a rise of 7.6% in Quarter 2. Whilst this looks like a strong figure, it is actually the lowest since the depth of the crisis period in 2009. Much of the growth is coming from investment spending on machinery, buildings and infrastructure. In contrast, net exports have declined by -5.5% in the first three quarters of the year, equivalent to a -0.5% decline in GDP. Elsewhere in Asia, and notably in India, growth has slowed sharply with trade-oriented economies exposed to weak export demand. The transition economies of Eastern Europe are exposed to the Eurozone crisis, but domestic demand is holding up reasonably well. Central and South America is suffering from below par growth in the US and Europe but growth will pick up in 2014, led by Brazil, the region’s largest economy. Prospects for Other Regions are mixed, being influenced by political instability, oil revenues, and infrastructure investment.


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2.1.2 Industrial Production Forecasts Global Summary

Forecasts of industrial production have been revised downward in all regions with the exception of North America.

Our forecast of growth in global industrial production of 2.1% this year compares with 2.5% in the Mid Year Review, reflecting a worsening in most major economies. Our forecast for 2013 has also been downgraded from 3.8% to 3.3%, with all regions, with the exception of North America, being revised downwards. More importantly for the corrugated industry, there has been a sizeable shift in the share held by infrastructure projects at the expense of manufacturing.

GLOBAL INDUSTRIAL PRODUCTION TRENDS AND FORECASTS – 2006 TO 2016 % CHANGE ON PREVIOUS YEAR

Region 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

North America 2.1 2.3 -3.7 -10.9 5.4 4.0 3.7 3.0 3.3 3.5 3.6

Europe 4.4 4.5 -1.1 -12.3 6.3 3.1 -1.4 1.0 2.4 2.5 3.0

Pacific Rim 6.7 4.9 -1.0 -13.1 17.6 1.7 2.2 3.5 3.5 3.3 3.6

China 16.2 13.5 12.9 11.0 15.7 13.9 10.3 12.0 11.2 10.8 10.4

Rest of Asia 6.8 7.7 3.6 2.2 9.7 3.4 3.1 5.8 6.8 7.3 7.3

C & S America 3.6 5.8 2.7 -6.3 9.0 2.0 1.6 3.4 4.4 3.8 3.8

Other Regions na na na na na na na na na na na

World 5.1 5.0 -0.1 -8.6 8.6 4.1 2.1 3.3 4.0 4.0 4.2

Source: EIU


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GLOBAL INDUSTRIAL PRODUCTION TRENDS AND FORECASTS – 2006 TO 2016 % CHANGE ON PREVIOUS YEAR

The following chart shows the extent of the downgrading of these forecasts, by comparing industrial production forecasts contained in last year’s main volume, prepared in July 2011, the interim forecasts contained in the Mid Year Review prepared in July 2012, and the current forecasts. It is worth noting that the substantial revisions to the European forecast account for about three quarters of the forecast revisions to total global production.

REVISED FORECASTS OF GLOBAL INDUSTRIAL PRODUCTION

2011 TO 2016 % CHANGE ON PREVIOUS YEAR

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Developed Economies

In the USA, August was the third month in a row for contraction in the manufacturing sector, with a further deterioration in the ISM’s index to 49.6. The index recovered to 51.5 in September, indicating a return to modest expansion, but then dropped marginally to 51.0 in October. Manufacturing is still struggling to add jobs more than 3 years after the recession was formally declared as over. In the Eurozone, the PMI’s index was broadly unchanged in August at 46.3; the index fell further to 46.1 in September and this was followed by a decline to 45.7 in October, with the slow down becoming more broadly based, with Germany – the engine economy – not immune to contraction. These declines are reflected in the aggregate Eurozone unemployment rate, now standing at a record 11.4%. Unemployment in Spain is now a staggering 25.1%, making the pursuit of austerity policies a particularly tough task.

Emergent Economies

In China, manufacturing output in August contracted at its fastest pace in nine months, with the PMI index falling to 47.8. A modest improvement in September to 49.2 would indicate a slowing of manufacturing contraction. Industrial production will continue to be seriously affected by weak external markets. Domestic markets will become increasingly important, as rising wages and other input costs impact on China’s competitiveness in export markets. Short-term forecasts of industrial production for 2012/13 in all emergent markets contained in the Mid Year Review have been further downgraded, reflecting the continued widespread slow-down in global trade.


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2.1.3 Downside Risks and Upside Gains to Economic Forecasts

Major downside risks to economic recovery are further Eurozone contagion, the US “fiscal cliff”, and slower recovery of emergent markets, with little evidence of any potential upside gains.

Downside Risks

The major downside risks to our economic forecasts relate to whether the Eurozone is actually “on the mend”. Northern creditor nations appear to be backtracking on the use of the European Stability Mechanism to recapitalise banks directly and on the use of bail out funds for intervention in secondary bond markets. In any event, it is difficult to see how such measures can lift the Eurozone economies out of the slump that they have fallen into. The second concern relates to the excessive fiscal tightening in the US, given the recent political deadlock. Current US legislation provides for large automatic tax increases and spending cuts scheduled to take effect a the beginning of 2013. This “fiscal cliff” could theoretically result in a fiscal withdrawal of more than 4% of GDP in 2013. This would effectively stall the growth in the US economy and would also have a major impact on world trade and commodity prices. The timing of the electoral cycle means that Congress has a relatively short time to reach agreement on a relaxation of these measures. The effect would be so extreme that, for that reason alone, the IMF assumes that the politicians will not allow this to happen and will, in the end, reach a consensus. A third downside risk applies to the emergent markets. In general, they have been achieving above average growth for over a decade, but there is now some concern that their future potential growth is overstated. In any event, future growth prospects are much lower than the rates achieved in the past, reflecting a general slow down in both export markets and inward investment.

A fourth potential risk to industrial output growth is the possibility of domestic banking crises in emergent markets. A sharp slow down in credit growth or outright contraction would have marked impacts on domestic demand and industrial output, in particular on sectors producing finance-sensitive items such as vehicles and big ticket consumer durables. Upside Gains

Under the prevailing circumstances, it is difficult to see any evidence of potential upside gains to the global economic environment. One possible area is oil price rises, which have abated in recent months, reflecting reduced geo-political risks and improved supply conditions. A final potential upside gain is one of market psychology. There is a high level of pessimism in all regions with few, if any pundits predicting a turning point, with a strong tendency for commentators to “talk us into a deeper recession”. The green shoots of recovery, when they do appear, will undoubtedly bolster business confidence.


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2.2 Comparisons between Corrugated Production and Overall Levels of Industrial Production

The relationship between industrial production and corrugated output is becoming increasingly tenuous and corrugated is forecast to lag slightly behind growth in industrial production.

While, traditionally, there has been some correlation between corrugated production and industrial production, this relationship has broken down in recent years, as a result of market volatility, declining output levels and changing inventories. Over the last 18 months, several factors have combined to further influence this disconnect between the two series:

There have been significant changes in the components of corrugated production,

notably an increase in the share held by FMCG markets, which are somewhat recession proof, and a corresponding decline in the industrial and consumer durables markets.

We are seeing significant changes in the components of industrial production, notably a reduction in the share held by manufactured goods packed in corrugated. This is resulting from the efforts of governments in both developed and emerging markets, to pursue infrastructure projects, such as building and construction, and communications/transport networks, in efforts to encourage growth without risking inflation and excessive direct stimuli to consumer demand.

There is now further evidence emerging of other factors adversely influencing corrugated demand, notably pressures for packaging reduction and reduced inventories throughout the manufacturing and distribution chain, which are unlikely to be recovered in the medium to long term, notably in Europe, as indicated in sub-section 2.3.2. These factors are examined further in the follow sub-section. In the meantime, the table below demonstrates that, whilst growth in corrugated production has exceeded that of industrial production in recent years, for the future we expect growth in corrugated to be slightly lower than that of industrial production, simply for the reasons outlined above.


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COMPARISONS BETWEEN GLOBAL INDUSTRIAL PRODUCTION AND CORRUGATED PRODUCTION BY

REGION – 2006 TO 2011 AND 2011 TO 2016 OVERALL % CHANGE

Country 2006 to 2011 2011 to 2016

Industrial Production Corrugated Production Industrial Production Corrugated Production

North America -3.7 -8.4 18.2 7.8

Europe -0.8 2.5 7.6 7.7

Pacific Rim 7.9 2.4 17.1 6.9

China 87.4 71.3 68.0 36.3

Rest of Asia 29.4 29.4 34.1 41.6

C & S America 13.2 20.1 18.2 15.0

Other Regions na 17.2 na 16.0

World 8.4 14.9 18.9 18.6

COMPARISONS BETWEEN GLOBAL INDUSTRIAL PRODUCTION AND CORRUGATED PRODUCTION BY

REGION – 2011 TO 2016 AND 2011 TO 2016 OVERALL % CHANGE

It is difficult to identify any discernible patterns in the correlation between the two indices in the various regions of the world. However, what is clear is that corrugated growth is forecast to lag that of industrial production in the developed regions but to significantly lead industrial production in all emergent markets, with the exception of China.

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Industrial and Corrugated Production – 2006 to 2011

Industrial and Corrugated Production – 2011 to 2016


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COMPARATIVE RATES OF RECOVERY IN INDUSTRIAL PRODUCTION AND CORRUGATED OUTPUT

ANNUAL % CHANGE

Region 2009 2010 2011 2012 2013 2014 2015 2016 Total % Change

2011-2016

Developed Regions

IP -12.4 6.7 2.9 1.0 1.9 2.7 2.9 3.2 12.2

Corrugated -6.7 4.7 1.1 0.5 1.4 1.6 1.7 1.8 7.1

Developing Regions

IP 4.1 14.1 8.8 6.3 8.3 8.3 8.1 7.9 45.4

Corrugated 5.4 12.2 5.4 4.3 5.5 6.2 6.2 6.2 31.6

TOTAL IP -8.6 8.6 4.1 2.1 3.3 4.0 4.0 4.2 18.9

Corrugated -1.7 8.0 3.1 2.3 3.3 3.8 3.9 4.0 18.6

These trends are a natural result of the maturing nature of corrugated markets in developed regions, where the need for cost economies and response to environmental pressures are most pronounced. For the developed economies of the USA and the Eurozone region, we estimate that the output of manufactured goods in the main markets using corrugated is growing at between 1.0% and 1.5% p.a. faster than growth in corrugated, as a result of these issues. In contrast, emergent markets are still benefiting from the increasing penetration of corrugated packaging and the development of new applications. In conclusion, whilst it is helpful to compare forecasts of corrugated production and industrial production, this process is becoming much less helpful as a forecasting exercise. In any event, over the last two to three years, we have repeatedly suffered from economists downgrading their predictions of industrial production, thus making the process even less reliable as a forecasting tool.


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2.3 Key Factors Influencing Demand For Corrugated

Previous editions have examined in detail the impact of economic and geo-political issues on the future pattern for corrugated. These continue to be important but additional factors are being examined this year and this section deals with the following:

Economic and political issues.

Changing inventory levels and the likelihood that these will not recover to previous levels.

Packaging reduction, arising out of the need for cost savings and in response to environmental/sustainability issues.

Retail developments and the adoption of Retail Ready Packaging (RRP).

Transit outer substitution trends.

2.3.1 Economic and Political Issues

The global economic and political outlook remains uncertain. Sub-section 2.1 summarised our global economic forecasts and our assessment of downside risks and upside gains and so will not be repeated here. In addition, a number of political factors are influencing prevailing levels of business confidence in downstream corrugated markets:

The first obvious issue is the outcome of the recent Presidential election in the USA.

Obama’s Democrats have retained control of the Senate, while the Republicans retain control of the Congress. The Senate, the Congress and the President all have distinct areas of power and can veto each other’s measures. So the election results have done nothing to alleviate the “fiscal cliff” situation, but the assumption remains that Republicans and Democrats will come to an agreement at the last minute, as they have done in the past.

Political tensions between China and Japan over disputed island territories have caused some disruption to Japanese electronics and automotive business with China. A speedy political resolution would remove the potential for further disruption over the longer term.

Political instability continues to be a risk impacting on the price and availability of oil, but, on balance, further deterioration is unlikely.

In conclusion, the global economic and political environment remains somewhat unpredictable and it appears that the more traditional economic certainties concerning growth and cyclical recovery no longer apply to the prevailing economic conditions.

2.3.2 Changing Inventory Levels

Future corrugated output will suffer from lower inventory levels.


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Historically, close control over inventories and the adoption of Just-in-Time sourcing practices have resulted in steady reductions in demand for packaging materials compared with final demand for packaged products. Clearly, the current recessionary conditions in developed markets, notably the Eurozone region, are creating a short-term spike in inventories that are too large to service prevailing market needs, resulting in the need for some downward adjustments to output. In addition, recent limits on cash flow have resulted in increased sophistication of inventory management, and in particular the growing importance of vendor-managed inventories throughout the supply chain. In the past, inventories would typically be cut back during an economic downturn, but, during a recovery, would be built back to “normal” levels. There is growing evidence in Europe that inventories are now being managed increasingly tightly, even when markets conditions are improving, resulting in a further reduction in the volume of stocks held each year. Respondents in North America hold similar views, although in the US, inventories relative to sales throughout the supply chain have remained fairly constant, albeit at historically low levels. 2.3.3 Packaging Reduction

Packaging reduction arising out of more intense cost control and environmental issues will have a further impact on corrugated demand levels

The need for packaging reduction arises out of the current austere conditions triggering more intense and innovative cost control, aided and abetted by the need for retailers, packers and packaging suppliers to react to more stringent environmental and sustainability targets. As always, cost is the driver, whilst environmental issues offer a convincing argument. Developed regions of the world are witnessing continued pressure from the leading retail chains for on-going, year-on-year reductions in overall product costs and also in packaging weight. This translates into packaging design economies incorporating, for example, smaller flap sizes, shallower trays and the reduced use of fitments as well as the substitution of RSCs by die cuts and open top cases. In some instances, the reduction in weight of the primary pack (for example, the move from glass to plastic bottles for beverages) means that less robust transit packaging can be used, which may include a switch out of corrugated to shrinkwrapping.

The growth in concentrated products – for example, for detergents – means that less product and therefore less packaging volume is needed to perform the same function. Similarly, in the electronics market, the replacement of desktop computers, first by laptops and then by tablets, and the miniaturisation of audio and telecom equipment all result in less packaging being required. Efforts to reduce manufacturing and conversion waste will have some impact on demand for corrugated and containerboards, but this is being off-set to some extend by continued fragmentation of order sizes. All these developments impact on the area demand for corrugated. In addition, all regions are witnessing substance weight reductions impacting on the tonnage demand for corrugated. This is examined further in the following section 2.4 which covers changing corrugated specifications.


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2.3.4 Retail Developments and the Adoption of Retail Ready Packaging (RRP)

RRP will have a significant influence on corrugated specifications.

All regions of the world – both developed and emerging – are experiencing changes in the structure of retailing, with the main trends being:

Continued steady growth in the share held by super/hypermarkets that generally

adopt fixed-format retailing which involves the increasing adoption of shelf-ready packaging.

Rather more growth is evident in the share held by hard discounters creating additional growth in demand for display-ready packaging. This trend is particularly pronounced in Europe where display outers incorporating decorative print and white inner liners are on the increase. In contrast, in the US discounting sector corrugated outers tend to be purchased unopened.

Growth in multiple convenience stores and other outlets, such as filling stations, leisure centres and food service outlets. These new retail formats will drive up convenience impulse retailing for products consumed “on the go” with associated product and pack formats creating a move to smaller transit outer sizes to service these outlets.

Substantial growth, from a low base, in the use of mail order distribution applied to Internet shopping. This has a positive impact on the demand for corrugated packaging, arising out of the need to provide further transit outer protection to goods supplied from the retailer/distribution centre to the ultimate consumer.

RRP is, without doubt, the most important retail issue influencing corrugated packaging in FMCG markets. RRP is widely adopted in Europe, where it now accounts for roughly 50% of FMCG corrugated packaging. It is also becoming increasingly adopted in the US, evidenced by the recent announcement of a licensing agreement involving two-piece shelf-ready packaging between DS Smith and RockTenn. In emergent markets, expansion of modern grocery retailing is being driven by western supermarket chains investing in retail developments through acquisition, joint venture and green field sites. For most countries, these developments have quite a long way to go and require substantial infrastructure development to support the demands of modern supply chains and distribution. However, they will invariably bring with them moves towards RRP in order to increase speed to shelf, reduce out-of-stock situations and improve merchandising productivity. Whilst these are all clear benefits to the retailer, a more important issue for corrugated is that, with the arrival of the transit outer on the supermarket shelf, brand owners are becoming increasingly concerned over how their brands are displayed at the Point of Sale. There is much concern over the risk that the brand may be obscured, or that its presentation may be less appealing than that of its peer group brands. The marketing need to communicate consumer propositions at the Point-of-Sale, to help build the brand and to stimulate sales at the point of purchase, represent significant opportunities for the creative corrugated supplier.


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2.3.5 Transit Outer Substitution Trends

Little change is forecast in the market share held by corrugated

There have been few, if any, changes in the relative shares between corrugated and competitive transit outer materials since the publication of our last report. Corrugated continues to take business from wood, but is experiencing some inroads from reusable plastic crates, notably for fresh foods, where packaging is generally unautomated and subject to damp packaging environments. In developed regions, notably Europe, there is a continued move towards reusable bulk systems for liquids, but this trend is less in evidence in other developed markets such as the USA. Instead, corrugated demand here is suffering from continued substitution by shrinkwrap, often without supporting corrugated trays. In developing countries, traditional local markets selling loose products are being displaced by modern retailing formats, involving substitution to corrugated transit packs from wooden crates, underpinned by greater concern for hygiene and food safety by packers, retailers and consumers. In conclusion, whilst there are a number of marginal substitution trends, the market share held by corrugated appears to be fairly constant. Any potential moves out of corrugated in FMCG markets are influenced in the short term by lack of funds and sentiment for the required investment. In the longer-term, corrugated will continue to benefit from its presentation characteristics (compared with reusables in particular), its versatility/flexibility for a variety of packaging formats and its environmental/sustainability attributes.

2.4 Changing Corrugated Specifications

The developments examined in the previous section will have a marked impact on corrugated specifications. In this section, we provide a brief summary of changes to:

Container constructions

Wall constructions and flute formations

Substance weights

Print and decorative processes

2.4.1 Container Constructions

The move towards trays and die cuts continues unabated

The retail developments outlined in the previous section – the adoption of Retail Ready Packaging (RRP), the emergence of Internet shopping and growth in multiple convenience stores – will create a significant reduction in average container sizes. This will result in a marginal increase in corrugated consumption, but a much greater increase in conversion costs, arising out of the increased number of conversation operations involved.


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The trend towards trays and die cuts will continue, in response to the needs of RRP in FMCG markets and the quest for economies in industrial and consumer durables markets. However, the required investment in die cutting capacity and new end-of-line equipment across a broad range of locations, products and brands will, to some degree, act as a brake on these moves, certainly in the short term.

2.4.2 Wall Constructions and Flute Formations

Microflute continues to offer above average growth potential.

In developed markets, there is little change evident in the relative shares of single wall vs. double wall and triple wall corrugated. However, in emergent markets, notably in China, there is a marked trend from multi wall to single wall constructions, arising out of the decline in the share held by “township markets”, and significant investment in modern containerboard machines and corrugators, involving a move towards higher-quality materials. An increase in the share held by domestic vs. export markets and a corresponding increase in the share held by FMCG sectors is also influencing this trend. Significant growth in decorative print processes and the wider adoption of RRP is resulting in continued growth in microflute constructions, comprising E-flute and fineflute (F-, G- and N-flute configurations). In recent months, this trend to microflute in Europe has been influenced to some extent by the introduction of intermediate flute profiles (R-, S-, T- and P-flute), between conventional B- and E-flute configurations; such moves are expected in other regions.

2.4.3 Substance Weight Reductions

Substance weight reductions will result in a 5-year yield improvement of 4.2%.

The developments reported in last year’s edition continue, with substance weight reductions evident in all regions. These developments are most pronounced in China for the reasons outlined above, involving substance weight reductions of almost 10% over the forthcoming 5-year period. In contrast, North America will see only marginal moves towards lighter substance weights with an anticipated yield improvement of only 1.4%. Wholesale moves towards lighter basis weights in the USA will be limited by the influence of current materials handling, distribution and storage methods, notably the relatively high stacking heights evident in the US. Further factors mitigating against lighter substance weights include reluctance amongst containerboard mills to move down the substance spectrum, and the fact that the existing machine park of corrugators and conversion equipment is less able to run effectively on lightweight substances. However, there is no logical argument against the value for money and the environmental attributes of lighter-weight boards. Continued reductions will continue to be made, with improved qualities of containerboards and innovative packaging design, in particular in relation to the corner stacking strength of die cut containers and resistance to bowing of the base of the container.


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Use of lightweight containerboards (defined of liners of 100 gsm and less and flutings of 90 gsm and less) are currently confined largely to the European market, although these lightweight grades will be adopted more and more in virtually all regions of the world but with the possible exception of the North American market. Overall, substance weights are forecast to decline by an average -0.8% p.a. over the next 5 years, creating a yield gain of 4.2%.

IMPACT OF SUBSTANCE WEIGHT REDUCTIONS ON CORRUGATED TONNAGE DEMAND

2006 TO 2011 AND 2011 TO 2016 OVERALL % CHANGE

Region % Change in Yield

2006 to 2011 2011 to 2016

North America -4.5 -1.4

Europe -3.3 -4.0

Pacific Rim -2.1 -2.2

China -7.3 -9.6

Rest of Asia -1.8 -1.5

Central & South America -1.6 -2.2

Other Regions -2.2 -2.3

World -3.2 -4.2

2.4.4 Print and Decorative Processes Decorative print will grow at roughly twice the rate of corrugated as a whole

Decorative processes comprise high quality flexo post print (3+ colour with interstation drying, normally a standalone unit), litholaminating (including panel labelling), direct litho, screen print and digital; collectively these decorative processes account for around 11% of the total global market. Historically, consumer durables and electrical goods have been important users of decorative print processes, although recently, these sectors have suffered from reduced consumer disposable income, a decline in the sales of high-ticket items in developed markets and reduced exports of these products from emergent markets. In FMCG markets, fragmentation of above-the-line media and increased awareness of the impact of Point-of-Sale propositions, coupled with multiple retailers’ and brand owners’ requirements for RRP, are resulting in the retail store becoming a much more powerful marketing environment. As a result, global demand for decorative corrugated is forecast to grow at double the rate for corrugated as a whole. Litholaminating holds the largest share, and this process will continue to grow, because it offers the best possible print quality, involving photographic standards of reproduction.


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Pre-print is suffering from the new generation, high quality, flexo post print presses that are now available, which offer much improved resolution and additional flexibility compared with pre print. These new generation, high quality, flexo post print presses have managed to secure a significant stronghold in the decorative sector and the level of print resolution that these presses now offer is close, although not equal to the photographic reproduction achieved by litho. Screen print continues to expand, despite its costly and labour-intensive nature, the main application being large format bulk displays, such a pre packs and dump bins as well as life-sized figures for cinemas, etc. Large format digital presses which have recently been introduced that offer high levels of print quality and flexibility. However, their use is limited to very short runs because of the relatively expensive ink costs involved.

The direct litho process has not achieved much of the promise expected of it. We had expected that this process would allow cartonmakers the opportunity of extending their portfolio into micro-flute corrugated. However, in reality, this has not happened and the main problems have been the high cost of retro fitting litho presses, slower running speeds when handling micro-flute, problems of board crush during printing and problems associated with sourcing boards that are completely free from warp. In the medium to long term, the need for improved graphics in both developed and emerging regions will result in demand for white liners increasing at a much faster rate than that for corrugated as a whole, estimated at around 5.0 to 5.5% p.a. A key factor in this trend is that growth in demand for white corrugated containers is being supercharged by growth in demand for containers incorporating both white outer and white inner liners, a particularly important issue for limited list discounters displaying partially empty display outers.

2.5 Summary Forecasts Of Global Corrugated Demand

2.5.1 Forecasts by Area

Global corrugated demand will grow by an average 3.5% p.a. based on area, well below the historical trend.

The following three tables show past trends and forecasts of corrugated production expressed in terms of per cent change over previous year, million square metres (Msm) and billion square feet (Bsf) for the period 2012 to 2016.


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GLOBAL CORRUGATED PRODUCTION TRENDS AND FORECASTS BY AREA 2006 TO 2016

% CHANGE

Region Past Trend Forecast

2006 %

2007 %

2008 %

2009 %

2010 %

2011 %

2012 %

2013 %

2014 %

2015 %

2016 %

North America 1.0 -1.3 -3.5 -7.8 3.7 0.6 0.9 1.3 1.7 1.8 1.9

Europe 5.1 2.6 -1.6 -5.7 6.0 1.6 -0.1 1.7 1.9 2.0 2.1

Pacific Rim 1.5 1.5 -2.5 -4.8 6.3 2.3 1.2 1.3 1.4 1.5 1.3

China 15.1 15.4 9.1 10.1 15.5 7.0 5.0 6.0 7.0 7.0 7.0

Rest of Asia 7.7 6.7 4.8 1.0 10.7 3.5 5.5 7.4 7.6 7.7 7.8

C & S America 3.3 4.2 3.1 1.4 7.4 2.6 1.5 3.0 3.5 3.1 3.1

Other Regions 2.1 4.4 3.3 0.7 4.1 3.7 2.7 2.9 3.1 3.2 3.2

World 5.0 4.0 0.8 -1.7 8.0 3.1 2.3 3.3 3.8 3.9 4.0


% CHANGE

-10

-5

0

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

North AmericaEuropeChinaRest of WorldWorld


28


MSM

Region

Past Trend Forecast 2006 to

2011 % pa

2011 to

2016 % pa

2006 Msm

2007 Msm

2008 Msm

2009 Msm

2010 Msm

2011 Msm

2012 Msm

2013 Msm

2014 Msm

2015 Msm

2016 Msm

N. America 46881 46248 44635 41151 42663 42933 43331 43875 44628 45420 46277 -1.7 1.5

Europe 47977 49218 48414 45674 48415 49180 49144 49956 50887 51883 52954 0.5 1.5

Pacific Rim 20321 20632 20117 19144 20355 20816 21073 21350 21646 21967 22248 0.5 1.3

China 29381 33899 36992 40734 47048 50341 52858 56030 59952 64149 68639 11.4 6.4

Rest of Asia 14261 15211 15942 16096 17819 18450 19471 20921 22516 24253 26133 5.3 7.2

C & S America

10416 10852 11188 11345 12190 12512 12702 13087 13542 13961 14395 3.7 2.8

Other Regions

7803 8149 8417 8473 8817 9144 9389 9665 9967 10284 10611 3.2 3.0

World 177040 184210 185704 182616 197307 203377 207969 214883 223139 231917 241257 2.8 3.5


MSM

0

10000

20000

30000

40000

50000

60000

70000

80000

NorthAmerica

Europe Pacific Rim China Rest of Asia C&SAmerica

OtherRegions

2006

2011

2016


29


BILLION SQ. FEET

Region


2011 % pa

2011 to

2016 % pa

2006 Bsf

2007 Bsf

2008 Bsf

2009 Bsf

2010 Bsf

2011 Bsf

2012 Bsf

2013 Bsf

2014 Bsf

2015 Bsf

2016 Bsf

N. America 504.4 497.6 480.3 442.8 459.1 462.0 466.2 472.1 480.2 488.7 497.9 -1.7 1.5

Europe 516.2 529.6 520.9 491.5 520.9 529.2 528.8 537.5 547.5 558.3 569.8 0.5 1.5

Pacific Rim 218.7 222.0 216.5 206.0 219.0 224.0 226.7 229.7 232.9 236.4 239.4 0.5 1.3

China 316.1 364.8 398.0 438.3 506.2 541.7 568.8 602.9 645.1 690.2 738.6 11.4 6.4

Rest of Asia 153.4 163.7 171.5 173.2 191.7 198.5 209.5 225.1 242.3 261.0 281.2 5.3 7.2

C & S America

112.1 116.8 120.4 122.1 131.2 134.6 136.7 140.8 145.7 150.2 154.9 3.7 2.8

Other Regions

84.0 87.7 90.6 91.2 94.9 98.4 101.0 104.0 107.3 110.7 114.2 3.2 3.0

World 1904.9 1982.1 1998.2 1965.0 2123.0 2188.3 2237.8 2312.1 2401.0 2495.4 2595.9 2.8 3.5

Global corrugated production grew by a substantial 8.0% in 2010, bouncing swiftly up from the -1.7% decline in 2009; however, output in 2011 was well below trend at +3.1% on 2010. Our forecasts prepared in July 2011 have been downgraded substantially in virtually all regions. It is clear, with hindsight, that the economic forecasts that were available 18 months ago failed to predict the continued depressed state of the developed economies of the world and the impact that this had on the emerging regions. Sadly, for the third year running, we are preparing forecasts of corrugated production against a background of economists’ deteriorating forecasts for both GDP and industrial production. In the Main Report prepared in July 2011, we predicted that global corrugated production would grow by 5.4% in both 2012 and 2013. In the Mid Year Review prepared in July 2012, this forecast was downgraded to 3.2% in 2012 and 4.9% in 2013. Since then, there have been further downward revisions and our current forecasts are for growth of 2.3% in 2012, 3.3% in 2013 and thereafter growth averaging 3.9% per annum, still well below the historical trend line.

China holds a 25% share of global corrugated output and will contribute half of the incremental corrugated business forecast.

In 2009, China overtook the USA as the largest global corrugated producer and, by the end of 2011, was 6.8 percentage points ahead. As the table overleaf indicates, no other country gets near China and the USA, with Japan ranked 3rd at 6.5% and Germany 4th at 4.4%. Interestingly, Brazil has moved up from 8th to 5th place over the last year.


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TOP 15 COUNTRY RANKING BY CORRUGATED OUTPUT – 2011 MSM

Country Msm % Share

China 50341 24.8

USA 36667 18.0

Japan 13143 6.5

Germany 8947 4.4

Brazil 6902 3.4

Italy 6516 3.2

India 6275 3.1

South Korea 5657 2.8

France 5581 2.7

Indonesia 4525 2.2

Spain 4467 2.2

UK 3878 1.9

Turkey 3374 1.7

Poland 3292 1.6

Mexico 3216 1.6

Top 15 162781 80.0

TOP 15 COUNTRY RANKING BY CORRUGATED OUTPUT – 2011 MSM

0

10000

20000

30000

40000

50000

60000

China

USAJa

pan

German

yBraz

ilIta

ly Ind

ia

South

Korea

France

Indon

esia

Spain UK

Turke

y

Poland

Mexico


31

The gap between China and the USA is forecast to widen progressively over the next five years and, by 2016, China’s share is estimated at 28.4% compared with the USA at 16.2%. In contrast, Europe’s performance will be disappointing with a current share of 24.2% declining to an estimated 21.9% by 2016. The following table summarises the incremental volume of business forecast to be generated by each of the leading countries over the next 5 years.

TOP 15 COUNTRY RANKING BY INCREMENTAL CORRUGATED OUTPUT

2011 TO 2016 MSM

Country Msm % Share % p.a.

China 18298 48.3 6.4

India 3291 8.7 8.8

USA 2406 6.4 1.3

Indonesia 2351 6.2 8.7

Brazil 1208 3.2 3.3

South Korea 976 2.6 3.2

Turkey 973 2.6 5.2

Mexico 811 2.1 4.6

Vietnam 718 1.9 8.9

Poland 694 1.8 3.9

Thailand 664 1.8 3.9

Russia 596 1.6 4.0

Japan 426 1.1 0.6

Germany 418 1.1 0.9

Philippines 254 0.7 4.0

Top 15 34083 90.0 3.9


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TOP 15 COUNTRY RANKING BY INCREMENTAL CORRUGATED OUTPUT 2011 TO 2016

MSM

The global corrugated industry will generate an additional 38 billion square metres of business over the period 2011 to 2016; this compares with our previous forecast of incremental business of 59 billion square metres for the period 2010 to 2015. This reflects the lower growth prospects for the next 5 years, estimated at 3.5% p.a. compared with the 5.4% p.a. forecast contained in last year’s edition. China dwarfs all other regions, generating half the incremental business. The USA is ranked a distant second with incremental volumes benefiting more from its absolute size than its growth potential. Again, European countries do not fair well, with the relatively high growth European economies of Turkey and Poland in 7th and 10th place, and with Germany, hitherto the powerhouse of the Eurozone region, ranked a disappointing 14th place.

0

5000

10000

15000

20000

China

India

USA

Indon

esia

Brazil

South

Korea

Turke

y

Mexico

Vietna

mPola

nd

Thaila

nd

Russia

Japa

n

German

y

Philipp

ines


33

2.5.2 Comparisons between Previous and Current Forecasts

5-year growth trends have been revised downwards from 5.4% to 3.3% p.a.

Global corrugated production amounted to 203 billion square metres in 2011, 1.1% below the prediction in last year’s edition.

COMPARISONS BETWEEN PREVIOUS AND CURRENT FORECASTS – 2010-2015 MSM

Region Previous Forecast Current Forecast

2010 Msm

2011 Msm

2015 Msm

2010-15 % p.a.

2010 Msm

2011 Msm

2012 Msm

2015 Msm

2010-15 % p.a.

North America 42663 43163 46551 1.8 42663 42933 43331 45420 1.3

Europe 48411 49685 54493 2.4 48415 49180 49144 51883 1.4

Pacific Rim 20355 20711 22009 1.6 20355 20816 21073 21967 1.5

China 47048 53164 83130 12.1 47048 50341 52858 64149 6.4

Rest of Asia 17601 18635 25105 7.4 17819 18450 19471 24253 6.4

C & S America 10744 11157 12719 3.4 12190 12512 12702 13961 2.8

Other Regions 8826 9119 10341 3.2 8817 9144 9389 10284 3.1

World 195649 205634 254348 5.4 197307 203377 207969 231917 3.3

In 2011, all regions came in at below the previous forecast, with the exception of the Pacific Rim, with Japan recovering from its traumatic experiences rather more swiftly than predicted. However, the most significant revisions to our forecasts are for 2012, downgraded from 5.4% to 2.3% and, for 2013, downgraded from 5.4% to 3.3%. Our forecasts for subsequent years from 2014 to 2016 have also been downgraded, although not to quite the same extent, resulting in a reduction in the average growth for the period 2010 to 2015 from 5.4% p.a. to 3.3% p.a.


34

Comparisons between previous and revised forecasts for each region are summarised in the following graph:

COMPARISONS BETWEEN PREVIOUS AND CURRENT FORECASTS – 2010-2015

% P.A.

Comparisons between previous and current forecasts for the period 2010 to 2015 are contained in the table below, together with our forecast for 2011 to 2016.

GROWTH IN GLOBAL CORRUGATED OUTPUT – 2010 TO 2016

INDEX AND AVERAGE ANNUAL % GROWTH

Region Previous 2010-2015 Revised 2010-2015 Revised 2011-

2016 Index

2010 = 100 Avg % p.a.

Index 2010 = 100

Avg % p.a. Avg % p.a.

North America 109.1 1.8 106.5 1.3 1.5

Europe 112.6 2.4 107.2 1.4 1.5

Pacific Rim 108.1 1.6 107.9 1.5 1.3

China 176.7 12.1 136.3 6.4 6.4

Rest of Asia 142.6 7.4 136.1 6.4 7.2

C & S America 118.4 3.4 114.5 2.8 2.8

Other Regions 117.2 3.2 116.6 3.1 3.0

World 130.0 5.4 117.5 3.3 3.5

0

2

4

6

8

10

12

14

North America Europe Pacific Rim China Rest of Asia C&S America Other Regions

Previous

Current


35

GROWTH IN GLOBAL CORRUGATED OUTPUT – 2010 TO 2015 INDEX 2010 = 100

5-year forecasts for all regions have been downgraded with the most significant changes to our forecasts being in China and Europe. In the USA, industrial production forecasts through to 2016 have been revised marginally upwards. However, the growth in industrial production will continue to be driven by durables, with non durables increasing at only about half the overall rate. Furthermore, the gap between growth in non durables and corrugated is expected to continue to widen, and our forecasts for corrugated through to 2016 have been revised downwards accordingly.

2.5.3 Per Capita Corrugated Production

5-year per capita corrugated output will grow by 35% in China, 30% in rest of Asia and marginally elsewhere.

The world’s population will grow by 5.9% over the next 5 years, whilst corrugated production is forecast to increase by an overall 18.6%, resulting in a 12.9% growth in per capita corrugated consumption. Per capita corrugated consumption will increase marginally in all regions, at between 3.0% and 7.0%, with the exception of China, where we are predicting a substantial increase of 35%, and the Rest of Asia showing a per capita increase of 30%.

0

30

60

90

120

150

180

210

NorthAmerica

Europe Pacific Rim China Rest ofAsia

C&SAmerica

OtherRegions

World

Previous

Revised


36

PER CAPITA TRENDS IN CORRUGATED PRODUCTION 2011 AND 2016

Region

2011 2016

Population (Mn)

Corrugated Production

(Msm)

Per Capita Corrugated Production

(m2) Population

(Mn)

Corrugated Production

(Msm)

Per Capita Corrugated Production

(m2)

North America 457 42933 94 479 46277 97

Europe 780 49180 63 786 52954 67

Pacific Rim 200 20816 104 201 22248 111

China 1348 50341 37 1382 68639 50

Rest of Asia 1906 18450 10 2041 26133 13

C & S America 493 12512 25 525 14395 27

Other Regions 1353 9144 7 1508 10611 7

World 6538 203377 31 6922 241257 35

PER CAPITA TRENDS IN CORRUGATED PRODUCTION 2011 AND 2016

(M2)

2.5.4 Average Substance Weights

Substance weights will decline by an average 0.8% p.a.

The table below summarises substance weight reduction forecasts for each region, arising out of the developments noted under sub-section 2.4.3.

0

20

40

60

80

100

120

NorthAmerica

Europe PacificRim

China Rest ofAsia

C&SAmerica

OtherRegions

World

20112016


37

GLOBAL CORRUGATED WEIGHT TRENDS AND FORECASTS 2006 TO 2016

g/m2

Region


2011 % pa

2011 to

2016 % pa

2006 g/m2

2007 g/m2

2008 g/m2

2009 g/m2

2010 g/m2

2011 g/m2

2012 g/m2

2013 g/m2

2014 g/m2

2015 g/m2

2016 g/m2

North America

665 665 655 636 636 636 634 632 630 628 627 -0.9 -0.3

Europe 537 534 531 527 524 520 515 511 507 503 499 -0.7 -0.8

Pacific Rim 652 650 648 644 641 638 636 633 630 627 624 -0.4 -0.4

China 717 703 689 682 675 665 652 639 626 614 601 -1.5 -2.0

Rest of Asia 601 601 599 596 593 590 588 586 584 583 581 -0.4 -0.3

C & S America

599 598 594 590 585 590 587 584 580 578 577 -0.3 -0.4

Other Regions

581 579 576 573 571 568 566 563 561 558 555 -0.4 -0.5

World 625 622 617 611 608 605 600 595 590 585 580 -0.6 -0.8

GLOBAL CORRUGATED WEIGHT TRENDS AND FORECASTS

2006 TO 2016 g/m2

2.5.5 Forecasts by Weight

Tonnage demand will grow at 0.9% p.a. below average area growth.

A reduction in substance weights of -4.1% overall for the next 5 years will result in tonnage demand increasing at an average rate of 2.6% p.a., compared with area growth averaging 3.5% p.a. Regional forecasts of tonnage demand are provided in the following table.

0

100

200

300

400

500

600

700

800

NorthAmerica

Europe Pacific Rim China Rest ofAsia

C&SAmerica

OtherRegions

World

200620112016


38

GLOBAL CORRUGATED PRODUCTION TRENDS AND FORECASTS BY WEIGHT 2006 TO 2016

KT

Region


2011 % pa

2011 to

2016 % pa

2006 KT

2007 KT

2008 KT

2009 KT

2010 KT

2011 KT

2012 KT

2013 KT

2014 KT

2015 KT

2016 KT

North America

31189 30746 29238 26184 27132 27288 27459 27720 28113 28530 28993 -2.6 1.2

Europe 25771 26305 25707 24085 25364 25554 25320 25527 25790 26080 26401 -0.2 0.7

Pacific Rim 13249 13413 13027 12320 13050 13286 13393 13509 13635 13776 13886 0.1 0.9

China 21078 23832 25487 27784 31770 33484 34455 35792 37531 39355 41268 9.7 4.3

Rest of Asia 8572 9142 9549 9597 10564 10893 11442 12257 13156 14135 15192 4.9 6.9

C & S America

6243 6487 6640 6691 7137 7380 7451 7649 7859 8073 8303 3.4 2.4

Other Regions

4536 4716 4848 4857 5033 5198 5313 5444 5588 5739 5894 2.8 2.5

World 110637 114640 114497 111518 120050 123083 124833 127897 131673 135690 139937 2.2 2.6

2.6 Assessment of Downside Risks and Upside Gains

There are a number of factors influencing our forecasts that need to be examined when preparing upside and downside forecasts of corrugated production. Most of these represent both downside vulnerabilities as well as potential upside gains, dependent on their likely future impact. The main factors we examine in this section are:

Economic issues

Political issues

Monetary issues

Vagaries of the weather

Changing inventory levels

The extent of packaging reduction

Transit outer substitution

2.6.1 Economic Issues

Major downside vulnerabilities are Eurozone debt contagion, a Chinese hard landing and slower recovery in the US.

In sub-section 2.3.1, we briefly summarised the downside risks and upside gains to our economic forecasts, which can be summarised briefly as follows:


39

The impact of the Eurozone debt crisis spreading and acting as a brake on global economic recovery.

Excessive fiscal tightening in the USA and the need to reach an accommodation to avoid political gridlock over the “US fiscal cliff”.

Concerns that future growth potential in emergent markets might be overstated, and the impact of depressed export markets on output levels, particularly in China. This could be further exacerbated by rising wages lowering export competitiveness.

The possibility of domestic banking crises in emerging markets impacting on credit growth/contraction and investment.

For most of these factors, the downside risks appear to be far greater than the upside gains

2.6.2 Political Issues

Political vulnerabilities are small in relation to economic risks.

The main political downside risks and upside gains to our corrugated demand forecasts are:

The forthcoming Presidential election in the US, which is, in effect, delaying decisions rather than creating significant risks or potential gains, with an assumption that an accommodation will be reach over the impending “fiscal cliff”.

The Japanese government’s decision earlier this month to nationalise three of the Diaoyu or Senkaku islands, which are disputed territories claimed by China, Taiwan and Japan. This decision has triggered widespread anti-Japanese demonstrations across China, threatening bilateral trade and China’s outbound tourism to Japan. Escalation of this dispute could seriously effect trade flows and output in the Asia Pacific but we view this as a localised issue, limited largely to automotive and electronics sectors.

The risks of geo-political instability in the Middle East and its impact on oil prices, which could adversely affect input costs, inflation and the rate of global recovery. However, all the indications are that future oil prices will be more stable than in the recent past.

In conclusion, these political risks and potential gains, whilst interrelated with economic issues to some degree, are small in relation to the economic issues outlined above. 2.6.3 Monetary Issues

Changing currency parities will impact to some degree on regional demand patterns.

The Euro is currently under pressure from the Eurozone recession and further downgrading in its parity will reduce the competitiveness of imports, notably from emergent markets. The Canadian corrugated market has suffered with the high value of the Canadian Dollar against the US Dollar and this is expected to continue. Clearly, a weakening of the Canadian Dollar would benefit Canadian box makers, but the effects would be largely contained within the region.


40

Conversely, Mexican box makers have benefited recently from the low parity of the Peso against the US Dollar. Again, this is expected to continue but a substantial strengthening of the Peso would adversely affect Mexican exports both to the US and further afield. An increase in the Chinese Yuan exchange rate during 2011 and the early part of 2012 did little to quell opinion that it remained undervalued. Since then, there has been a reduction as China’s government reacted to a slowing of the economy and export trade. High Yen exchange rates are encouraging outward migration of manufacturing from Japan and are currently having some impact on export business. Significant downside risks for Oceania lie in the region’s close links with China and export ties with Europe. A depreciation of the exchange rate would greatly improve prospects for domestic manufacturing sector, but all the indications are that the Australian Dollar will maintain its current value, or indeed strengthen in relation to other currencies. We conclude that these changing currency parities are localised and relatively short term in their impact. 2.6.4 Vagaries of the Weather

Adverse weather has taken its toll but cannot be predicted

Fresh foods and produce account for only 7.8% of global corrugated demand, but in some regions, such as Central and South America, its share amounts to 22%. Accordingly, adverse weather patterns and national disasters such as the Japanese tsunami, the Thai floods, hurricanes in Central and South America, droughts and flooding in Oceania and South Africa represent significant downside risks and upside gains, but are clearly unpredictable.

2.6.5 Changing Inventory Levels

Assumptions concerning inventory levels, packaging reduction and transit outer substitution all represent both downside risks and upside gains

Our forecasts assume that recent declines in inventory levels in the developed markets of North America, Europe and Japan will not be recovered to their full extent. However, this would represent an upside gain if this were not the case.

2.6.6 Packaging Reduction

Our forecasts for developed regions assume that packaging reduction will deflate corrugated demand by an average 1.0-1.5% p.a. over the next 5 years. This could be an under or over estimate, influenced by the extent to which retailers, packers and corrugated suppliers react to austere market conditions and environmental/sustainability issues.

2.6.7 Transit Outer Substitution

Our forecasts assume little change in the market share held by corrugated in relation to competitive materials. The substitution from corrugated to RPCs may be understated. Conversely, research in the USA suggests that corrugated could make some inroads against returnables in the agricultural sector, representing a modest upside gain.


41

2.6.8 Summary of Downside and Upside Forecasts

Corrugated area growth forecasts are subject to prevailing business confidence levels, with a low of 2.8% p.a. and a high of 4.4% p.a.

By its very nature, an assessment of the downside risks and upside gains noted above can be nothing more than subjective and dependent very much on the levels of business confidence amongst our respondents. Without doubt, the major uncertainties relate to short-term economic prospects: in summary, our concerns are, and will continue to be, a European meltdown, a Chinese hard landing and a US slowdown. Not surprisingly, therefore, our forecast of the “likely outcome” is not a mid-point estimate but nearer to our downside forecasts. Our “likely outcome” forecast for global corrugated production is for growth averaging 3.5% p.a. over the next 5 years compared with a low of 2.1% p.a. and a high of 4.3% p.a.

SUMMARY OF GLOBAL UPSIDE AND DOWNSIDE FORECASTS OF CORRUGATED PRODUCTION – 2011 TO 2016


Annual % Change 2011 2012 2013 2014 2015 2016 2011-2016

% p.a. Index

2011=100

Low 3.1 0.9 1.8 2.4 2.6 2.6 2.1 110.7

Likely outcome 3.1 2.3 3.3 3.8 3.9 4.0 3.5 118.6

High 3.1 3.0 4.1 4.7 4.8 4.9 4.3 123.4

SUMMARY OF GLOBAL UPSIDE AND DOWNSIDE FORECASTS OF CORRUGATED PRODUCTION – 2011 TO 2016


0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016

Low

Likely outcome

High


42

Summary 5-year forecasts for each region are contained in the following table:

REGIONAL SUMMARY OF UPSIDE AND DOWNSIDE FORECASTS OF CORRUGATED PRODUCTION – 2011 TO 2016

AVERAGE % CHANGE 2011-16, INDEX 2011 = 100

Region 2011 – 2016 % p.a. 2011-2016 Index (2011= 100)

Low Likely

Outcome High Low Likely

Outcome High

North America 0.7 1.5 2.1 103.6 107.8 111.0

Europe -0.4 1.5 2.5 98.0 107.7 113.1

Pacific Rim 0.3 1.3 2.3 101.7 106.9 112.3

China 4.4 6.4 7.4 124.0 136.3 142.9

Rest of Asia 6.2 7.2 7.7 135.2 141.6 145.0

Central & South America 1.9 2.8 3.3 109.9 115.0 117.6

Other Regions 2.3 3.0 3.5 112.2 116.0 118.6

World 2.1 3.5 4.3 110.7 118.6 123.4

REGIONAL SUMMARY OF UPSIDE AND DOWNSIDE FORECASTS OF CORRUGATED PRODUCTION – 2011 TO 2016

INDEX 2011 = 100

In summary, the incremental business generated by the global corrugated industry over the next 5 years will be anything between 21.8 and 47.5 billion square metres:

COMPARISON OF INCREMENTAL FORECAST – 2011-2016

BSM % of 2016

Market % p.a. Downside forecast 21.8 9.7 2.1 Likely outcome 37.9 15.7 3.5 Upside forecast 47.5 18.9 4.3

0

20

40

60

80

100

120

140

160

NorthAmerica

Europe Pacific Rim China Rest of Asia C&SAmerica

OtherRegions

World

Low

Likely outcome

High


43

2.7 Global Shifts in Business Migration

The impact of business migration will be less than in the past with some evidence of “re-shoring”.

Historically, there has been a steady and continued move away from developed to emerging markets, resulting from:

Changes in the balance of imports and exports between developed and emerging

markets.

Relocation of manufacturing and assembly facilities to emergent regions because of their perceived cost advantages.

Last year, we reported on anecdotal evidence that migration from developed to emerging regions was starting to wane. This year, there is more evidence of this as the real costs of “off-shoring” – involving freight logistics, damage and problems relating to communications – become self evident. The developed regions of the world will see their global share decline from the current level of 53.0% of corrugated output to 47.9% in 2016. They will contribute only 20.2% of the incremental business forecast. However, this is significantly higher than the 18.0% share contained in last year’s edition, reflecting some easing in the level of migration. In contrast, the emerging regions of the world will increase their share from 47.0% to 52.1%; they will generate 79.8 % of the additional business and around 6.0% of this will be contribution by China.


44

INCREMENTAL BUSINESS GENERATED BY DEVELOPED AND DEVELOPING REGIONS ANALYSED BY REGION – 2011 TO 2016

MSM

Region Msm % Developed Regions

North America 3344 8.8

Europe 3773 10.0

Japan 426 1.1

Oceania 118 0.3

Sub Total Developed 7661 20.2

Developing Regions

Pacific Rim (ex Japan) 1006 2.7

China 18298 48.3

Rest of Asia 7683 20.3

Central & South America 1883 5.0

Other Regions 1349 3.6

Sub Total Developing 30219 79.8

TOTAL 37880 100.0

INCREMENTAL BUSINESS GENERATED BY DEVELOPED AND DEVELOPING REGIONS ANALYSED BY REGION – 2011 TO 2016

MSM

0

5000

10000

15000

20000

North

Am

erica

Europ

e

Japa

n

Ocean

ia

Pacific

Rim

(ex J

apan

)

China

Rest o

f Asia

C&S Am

erica

Other

Reg

ions

Developed Regions Developing Regions


45

2.8 Changing Pattern of End Use Demand

Little change is evident in global end use prospects, but prospects in each region vary considerably.

When viewed in a global context, there are few discernible trends in the relative shares of the main generic market sectors, with fast moving consumer goods and fresh foods markets maintaining a 52.2% share, with industrial and durables sectors holding a constant 43.1% share.

GLOBAL END USE MARKET PROSPECTS FOR CORRUGATED

2011, 2016 MSM, % SHARE

2011 2016 2010-2015

% p.a. Msm % Msm %

FMCG Markets 90083 44.3 106956 44.3 3.5

Fresh Foods/Produce 16013 7.9 18454 7.6 2.9

Durables 43234 21.3 51411 21.3 3.5

Industrial and Machinery 44268 21.8 52585 21.8 3.5

Others 9779 4.8 11851 4.9 3.9

TOTAL 203377 100.0 241257 100.0 3.5

GLOBAL END USE MARKET PROSPECTS FOR CORRUGATED 2011, 2016

MSM

The emergent regions of the world will continue to see a marked increase in their share of each main market sector; this applies in particular to the non-FMCG sectors, where their current share is a little over half the total.

0

20000

40000

60000

80000

100000

120000

FMCG Markets FreshFoods/Produce

Durables Industrial andMachinery

Others

20112016


46

TRENDS IN RELATIVE SHARES OF DEVELOPED AND DEVELOPING REGIONS, ANALYSED BY MARKET – 2011 TO 2016

% SHARE

Market 2011 2016

Developed (%)

Developing (%) TOTAL %

Developed (%)

Developing (%) TOTAL %

Processed Foods 63.8 36.2 100.0 59.1 40.9 100.0

Drinks 47.7 52.3 100.0 41.5 58.5 100.0

Non Food Consumables 60.4 39.6 100.0 55.4 44.6 100.0

Fresh Foods/Produce 54.9 45.1 100.0 50.4 49.6 100.0

Domestic Appliances and Electrical Goods

24.5 75.5 100.0 21.1 78.9 100.0

Durable Goods and Clothing 46.8 53.2 100.0 42.3 57.7 100.0

Industrial and Machinery 50.3 49.7 100.0 44.0 56.0 100.0

Others 75.2 24.8 100.0 71.8 28.2 100.0

TOTAL 53.0 47.0 100.0 47.9 52.1 100.0

TRENDS IN RELATIVE SHARES OF DEVELOPED AND

DEVELOPING REGIONS, ANALYSED BY MARKET – 2011 TO 2016 % SHARE

0

10

20

30

40

50

60

70

80

90

Proces

sed F

oods

Drinks

Non Foo

d Con

sumab

les

Fresh F

oods

/Produc

e

Domes

tic App

lianc

es & Elec

trical

Goods

Durable

Goo

ds an

d Clot

hing

Indus

trial &

Mac

hinery

Others

Proces

sed F

oods

Drinks

Non Foo

d Con

sumab

les

Fresh F

oods

/Produc

e

Domes

tic App

lianc

es & Elec

trical

Goods

Durable

Goo

ds an

d Clot

hing

Indus

trial &

Mac

hinery

Others

Developed and DevelopingRegions by Market

2011

Developed and Developing Regions by Market

2016


47

Over the next 5 years, the additional business captured by emerging markets will amount to 30.2 billion square metres. Of this, 49.1% will be in the industrial and durables markets, compared with 41.1% in FMCG sectors. This contrasts with last year’s edition, which reported a 37.0% share held by FMCG markets; this change reflects the poorer prospects for export markets in emerging countries, and an increasing reliance on domestic consumer markets to generate growth. In the developed regions of the world, FMCG markets will generate 57.3% of the 7.7 billion square metres of additional business forecast to be generated. The provision of attractive and innovative Retail Ready Packaging (RRP) will be a vital element in the development activities of corrugated suppliers intent on exploiting these sectors in developed and increasingly, in emergent regions of the world.

INCREMENTAL BUSINESS GENERATED BY DEVELOPED

AND DEVELOPING REGIONS – ANALYSED BY MARKET – 2011 TO 2016 MSM

Market Developed Developing TOTAL

Msm % Msm % Msm % Processed Foods 2488 30.4 5690 69.6 8179 100.0

Drinks 715 14.8 4118 85.2 4833 100.0

Non Food Consumables 1135 29.4 2726 70.6 3861 100.0

Fresh Foods/Produce 506 20.7 1935 79.3 2441 100.0


273 6.2 4165 93.8 4438 100.0

Durable Goods and Clothing 488 13.1 3251 86.9 3739 100.0

Industrial and Machinery 896 10.8 7422 89.2 8318 100.0

Others 1159 55.9 913 44.1 2072 100.0

TOTAL 7661 20.2 30219 79.8 37880 100.0


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3 GLOBAL BUSINESS MIGRATION FORECASTS

3.1 Global Summary

The global market for corrugated will grow at an average 3.5% p.a. from 203 billion square metres in 2011 to 240 billion square metres in 2016, generating an extra 38 billion square metres of business. The following table shows forecast changes in the share held by each region and the incremental business generated by each over the 5-year period, distinguishing between developed and emerging regions.

TRENDS IN RELATIVE SHARE OF DEVELOPED AND DEVELOPING

REGIONS – 2011 TO 2016 MSM

Region 2011 2016 2011-2016

Msm % Msm % % p.a. Inc. Msm

Developed Regions

North America 42933 21.1 46277 19.2 1.5 3344

Europe 49180 24.2 52954 21.9 1.5 3773

Japan 13143 6.5 13569 5.6 0.6 426

Oceania 2591 1.3 2709 1.1 0.9 118

Sub Total Developed 107847 53.0 115508 47.9 1.4 7661

Developing Regions

Pacific Rim (ex Japan) 7673 3.8 8679 3.6 2.5 1006

China 50341 24.8 68639 28.5 6.4 18298

Rest of Asia 18450 9.1 26133 10.8 7.2 7683

Central & South America 12512 6.2 14395 6.0 2.8 1883

Other Regions 6553 3.2 7902 3.3 3.8 1349

Sub Total Developing 95530 47.0 125749 52.1 5.7 30219

TOTAL 203377 100.0 241257 100.0 3.5 37880

The developed regions of the world will see their global share decline from 53.0% to 47.9% over the next 5 years, and they will contribute only 20.2% of the incremental business forecast. The developing regions of the world will increase their share from 47.0% to 52.1% over the same period, they will generate 79.8% of the business and almost two-thirds of this will be contributed by China. The trends outlined in our last report are still very much in evidence:

An easing in the rate of business migration from Europe and the US to the Asia

Pacific region.

Some investment out of China into neighbouring countries but growing emphasis on the domestic Chinese market, rather than exports.

Some investment out of Japan into neighbouring countries following the tsunami of 2011.

Growing investor interest in Asia, notably India.

Continued West to East migration in Europe.


50

While these trends are clearly evident, the impact of business migration on corrugated demand in developed vs. emerging markets will be less than it has been in the past. In the longer term, cost differentials between developed and emerging economies will, inevitably, narrow.

3.2 North America

While traditionally the North American market has suffered from a worsening trade balance with the Asia Pacific region, this is now moderating somewhat. Respondents appear to be more aware of recent reversals in “off shoring”. A recent study suggests that 50,000 jobs have been brought back into the US as people become aware of the total cost of “off shoring”. The price per piece is substantially cheaper but freight, logistics, damage, and emergency freight when there are delays all add up. This trend is also evident in Canada where there is some evidence of shipping in bulk and repacking locally. More importantly, there have been further losses due to major US manufacturers consolidating production in the US. Mexico continues to benefit from inward investment from the US and Japan, and some business has been regained from China, because of rising freight costs and also because of an improvement in Mexican labour competitiveness, resulting from the devaluation of the Peso. Production outside of the Maquila market, targeted both at exports and the growing domestic market, is becoming the major driver of corrugated demand. In the area close to the US border, the manufacture of toiletries and homecare products destined for the US market is also increasing. We conclude that, whilst there continues to be migration from North America to emerging regions of the world, its impact in the future will be somewhat less than that experienced in the past.

3.3 Europe

Over many years, Europe has suffered continued business migration to the Asia Pacific region and, within Europe itself, a significant shift from west to east. Recently, with the sorry state of most of its leading economies, Europe has certainly not attracted its fair share of inward investment, although the UK automotive industry, outside the Eurozone, has been a notable exception. Within the Eurozone region, there are far too many concerns over the state of each economy, the future parity of the Euro, the impact of moves towards fiscal union and, indeed, the ultimate membership of the Euro club. Despite these concerns, migration out of Europe is being held back to some extent by the lack of any propensity to invest in the current uncertain climate, with investors questioning future levels of final demand and concern over high inventories.


51

The situation in the Central and Eastern European economies is somewhat different, despite their reliance on exports to Eurozone markets. The Central European economies, in particular, have benefited from the migration of high skilled manufacturing activities in the electronics, domestic appliances and automotive sectors. However, the automotive sector is currently suffering from low demand levels and high inventories throughout Europe as a whole, and this will certainly influence future levels of direct foreign investment. The major conclusion to draw from shifts in business in Europe is the migration from east to west. Industrial and consumer durables markets in Western Europe will lose 93 msm of business over the next 5 years; in contrast, these sectors in Central and Eastern Europe will generate an additional 510 msm of business.

3.4 Pacific Rim

In Japan, business migration is generally in the outward direction for reasons of cost and proximity to market. China and India are important locations for Japanese automotive production and sales operations. Both automotive and electronics companies have become more aware of the need for supply chain security following disruption from the earthquake and tsunami in 2011. As a result, the concentration of expertise in high-tech sectors such as electronic components production is likely to be spread more widely in the future. The impact on corrugated demand will be a continued migration of manufacturing in electronics, automotive and industrial machinery, moving up the value chain. This will involve an outward migration to China, India and other parts of Asia, due to the need to disperse geographically concentrated sectors.

3.5 China

Rising labour costs continue to encourage outward migration of labour and resource-intensive industries such as textiles, clothing, luggage, electronics and electrical equipment, causing a shift to high-end manufacturing and services. The government has recently announced measures to encourage foreign investment into high-end manufacturing and energy generation. Companies are also migrating within China from locations in the south and east, hit by lower exports, to inland and western regions to take advantage of lower wage costs and closer proximity to 3rd- and 4th-tier cities. These developments reflect moves to concentrate more on domestic as opposed to export markets, which are currently in the doldrums. The impact for corrugated will be relocation of demand from low-tech industries in the south and the east, through movement of these sectors inland and to the west, plus some net losses to newly-emerging Asian economies.


52

3.6 Rest of Asia

Emerging nations with low wage costs, including Vietnam, Indonesia and India, have benefited in recent years from inward migration of low-tech manufacturing of textiles, footwear and electrical equipment. However, the costs of doing business, lack of infrastructure and rising labour costs, notably in India, Vietnam and Indonesia, will act as a brake on these developments. There is growing interest in direct foreign investment in Cambodia and Myanmar with movement of low-tech labour-intensive activities such as textiles expected to lead the way. However, significant infrastructure improvements will be needed to support such investments. The natural disaster of the tsunami in Japan has caused considerable disruption to electronics and automotive production operations, which is likely to result in some inward investment in manufacturing and some restructuring of cross-country operations to improve supply chain security across Asia. Foxconn is looking to expand their production away from China into Indonesia and Myanmar and possibly to other parts of Asia, to take advantage of lower-cost production. Some flat and LCD TV production has been moved out of Thailand to Vietnam and there is evidence of other low technology production migration, including basic electrical appliances and printers. In India, new investments in automotive-related products include expansion of components sourcing, engines and assembly operations by a number of companies including Volkswagen, Nissan Motor, VE Commercial Vehicles, Hyundai, Ford and Skoda. In the electronics sector, LG and Samsung have announced investments in mobile ‘phone manufacturing. All these moves indicate considerable investor interest in the ASEAN region. Whilst, in the short term, investors are being quite cautious towards new projects in response to the current downturn in world trade, levels of direct foreign investment in the region, notably in India, are expected to recover from 2014 onwards. The net impact of business migration on corrugated demand will be mixed, with the dispersal of some electronics and automotive production, resulting in inward migration from Japan and two-way movement between countries within and outside the region, including Taiwan and South Korea. In addition, there will be marginal moves from high-wage economies towards the newer emerging low-wage economies such as Cambodia and Myanmar.

3.7 Central and South America

Most of the larger Central and South American economies continue to attract direct foreign investment in manufacturing, with investments targeted to serve the growing local consumer markets, and to establish a base for supply throughout Central and South America for supplying the US and, to some extent, Canada. The rate of investment has slowed somewhat due to the slow down of the global economy, but is expected to show signs of accelerating again as world trade recovers. In Brazil, foreign investment is being encouraged by a favourable exchange rate, a growing middle class, and relatively low labour rates. The incentives for investment in local production are also helping to generate investment in automotive, white goods, brown goods


53

and electronics sectors. In addition, the government is attempting to discourage outward investment in low-tech sectors such as shoes, textiles and clothing. Other countries in Central and South America such as Mexico, Guatemala, Honduras, Costa Rica, El Salvador and Chile are gaining US business that had hitherto been supplied by China, as a result of lower freight rates and labour costs, as well as some currency benefits.

3.8 Other Regions

In Australia, indirect outward migration is occurring through loss of domestic manufacturing business to overseas suppliers, as a result of high exchange rates. Local businesses as well as multinational companies are assessing opportunities for relocating manufacturing facilities, on the assumption that the Australian Dollar will maintain, or perhaps increase, its value. Some movement of multinational consumer goods and electrical appliance manufacturing into the Middle East is evident, encouraged by low energy costs, modern infrastructures, favourable land prices and investment incentives. Similarly, across North Africa, multinationals are assessing potential for establishing low cost manufacturing facilities for regional operations, although poor infrastructure and political unrest could well limit these opportunities.


55

4 GLOBAL MARKET PROSPECTS

4.1 Introduction

This section examines the following end use markets on a global basis:

Processed foods

Drinks

Non-food consumables

Fresh foods

Domestic appliances and electrical goods

Durable goods and clothing

Industrial & machinery

Other sectors

For each market consumption of corrugated is quantified for each region, with forecasts of changes in its relative share and with additional commentary on end use developments within each region.

4.2 Summary of Global Market Prospects

GLOBAL END USE MARKET PROSPECTS FOR CORRUGATED – 2011 TO 2016

MSM AND % SHARE

2011 2016 2011-2016

% p.a. Msm % Msm %

Processed Foods 49306 24.2 57485 23.8 3.1

Drinks 20840 10.2 25673 10.6 4.3

Non Food Consumables 19937 9.8 23798 9.9 3.6

Fresh Foods/Produce 16013 7.9 18454 7.6 2.9


19160 9.4 23599 9.8 4.3

Durable Goods and Clothing 24073 11.8 27813 11.5 2.9

Industrial and Machinery 44268 21.8 52585 21.8 3.5

Others 9779 4.8 11851 4.9 3.9

Total 203377 100.0 241257 100.0 3.5

Very little change is expected in the relative share of each major end use when viewed in a global context. However, changes are rather more significant when examined at a regional level in subsequent sub-sections. This is because developed regions of the world hold a greater share of the FMCG sectors, whilst emergent regions have a major share of industrial and durables sectors.

Of the 38 billion square metres of additional business forecasts for the next 5 years, 44.6% will be generated by FMCG markets and 43.6% by industrial and durables sectors; fresh foods will generate only 6.4% of the additional business.


56

These growth patterns, summarised below, are very similar to those contained in last year’s edition.

GLOBAL END MARKET PROSPECTS FOR CORRUGATED

2011 TO 2016 INCREMENTAL BUSINESS MSM, % SHARE

Region Msm %

Processed Foods 8179 21.6

Drinks 4833 12.8

Non Food Consumables 3861 10.2

Fresh Foods/Produce 2441 6.4

Domestic Appliances and Electrical Goods 4438 11.7

Durable Goods and Clothing 3739 9.9

Industrial and Machinery 8318 22.0

Others 2072 5.5

Total 37880 100.0

4.3 Processed Foods

4.3.1 Processed Foods – Global Summary

Products included:

Biscuits, confectionery and snack foods

Dried foods and beverages

Canned and bottled foods

Frozen and chilled foods

Dairy products


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END USE MARKET PROSPECTS FOR CORRUGATED – PROCESSED FOODS

2011, 2016 MSM, % SHARE

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 14266 28.9 15262 26.5 1.4

Western Europe 9749 19.8 10465 18.2 1.4

Central & Eastern Europe 3369 6.8 4008 7.0 3.5

Sub Total Europe 13118 26.6 14473 25.2 2.0

Pacific Rim 4692 9.5 4948 8.6 1.1

China 5799 11.8 8456 14.7 7.8

Rest of Asia 3433 7.0 4929 8.6 7.5

Sub Total Asia 9233 18.7 13385 23.3 7.7

C&S America 4779 9.7 5622 9.8 3.3

Other Regions 3218 6.5 3796 6.6 3.4

World 49306 100.0 57485 100.0 3.1

Corrugated demand for processed foods will grow at an average 3.1% p.a. over the next 5 years, somewhat lower than the total corrugated growth of 3.5% p.a. The developed regions of the world are now relatively mature and offer below average growth, despite being fairly recession proof. Consumption patterns are influenced by dietary and health issues, as well as moves to smaller households. Emergent markets are showing better growth, with trends towards western style foods, investment in the local retailing infrastructure, growth in the middle classes and inward investment by multinationals. Best prospects continue to be centred on frozen and chilled variants and other convenience foods, notably “food-on-the-go”, which offer high levels of convenience and consumer choice. The share of the processed foods sector held by emergent markets stands at 36.2% compared with the 63.8% share held by developed regions, reflecting the less developed grocery retailing markets and the importance of industrial and consumer durables exports in emergent markets. Over the next 5 years, emergent markets will increase their share from 36.2% to 40.9% and the Asia Pacific region will account for 53.9% of the additional business generated.


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END MARKET PROSPECTS FOR CORRUGATED – PROCESSED FOODS – 2011 TO 2016 INCREMENTAL BUSINESS

MSM, % SHARE

Region Msm %


Western Europe 716 8.7

Central & Eastern Europe 639 7.8

Sub Total Europe 1355 16.6

Pacific Rim 256 3.1

China 2657 32.5


Sub Total Asia 4152 50.8



World 8179 100.0

4.3.2 Processed Foods – North America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 14266 28.9 15262 26.5 1.4

The share of processed foods in total corrugated consumption in North America fell in 2011, and growth is now forecast to be slightly below average over the next 5 years. Both the US and Canadian markets are mature, and there is evidence that consumers are economising on food, buying smaller portions to avoid wastage and buying fewer fast foods. Markets for pasta, cereals and snacks are all weak, and grain prices are being adversely impacted by the effect of the droughts during 2011. Milk yields in the US are also down as a result of the drought, restricting the growth of the yoghurt and cheese markets. The processed food market is also particularly subject to pressures from retailers for packaging economies. The Mexican market is showing much stronger growth, fuelled by an increasing population and rising income levels. Non-traditional convenience foods, such as quick-cook noodles and pasta, are gaining share.

4.3.3 Processed Foods – Europe

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Europe 13118 26.6 14473 25.2 2.0

Processed Foods markets in Europe are fairly recession proof and so offer above average prospects for corrugated.


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Biscuits, cakes and bakery products are suffering from dietary concerns and a trend from bread towards more convenient forms – notably breakfast cereals, ready-made sandwiches and other ‘food-on-the-go’.

Sales of sugar confectionery across Europe are flat, again largely for health reasons – diabetes, obesity and dental care – with low sugar content formulations growing steadily. Despite this, sales of chocolate confectionery continue to grow amongst consumers who are reluctant to sacrifice taste and indulgent pleasures. Sales of snack foods are growing steadily with the displacement of sweet snacks by savoury products, with most of the growth in corn-based products, with demands for potato-based snacks remaining flat. Whilst canned, bottled and dehydrated convenience foods are benefiting from their relative value for money, frozen and chilled foods still provide the best growth potential. Both frozen and chilled foods are benefiting from the trend towards meal occasions at home at the expense of eating out. Limited disposable income has had some impact on the rate of displacement of frozen by chilled foods, notably for ready meals and pizzas, as a result of greater emphasis on quality combined with value for money.

4.3.4 Processed Foods – Pacific Rim

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Pacific Rim 4692 9.5 4948 8.6 1.1

In Japan, an aging population plus smaller families and sluggish economic outlook increasingly limit growth for processed food products. The 2011 tsunami caused a spike in sales of processed food as consumers stocked up on essential foods, but shortly after sales reversed as consumers de-stocked. Private label brands are gaining share, especially in the more basic categories such as rice, pasta, vegetable and seed oil. In South Korea, smaller households, a higher proportion of women entering the workforce and growth in supermarkets/hypermarkets are driving up demand for frozen and processed foods, as time deprived consumers look for easy meal options. Premium products are showing above average growth. Moderate growth is expected in packaged food demand in Taiwan as economic growth picks up. Japanese imports are popular in Taiwan but lack of supply and concerns over radiation affected sales during 2011. Health foods are gaining ground across the region and are expected to benefit from an aging population.

The reputation of major Taiwan food producers’ was seriously dented in 2011 when dangerous levels of industrial plasticiser were found in a range of food and drinks products,


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leading to over 900 different products being withdrawn from retail outlets in Taiwan, China, japan and South Korea but the longer term impact appears to have been contained.

4.3.5 Processed Foods – China

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

China 5799 11.8 8456 14.7 7.8

Consumers are increasingly demanding processed foods for convenience, but growth is moderated by rising input costs. Frozen foods is now a highly developed fast growing modern industry with on-going investment in capacity expansion at the two largest producers: San Quan and Synear. Other sectors showing high growth include health foods, snack foods, chocolate confectionery, bakery and prepared meats. Coffee drinking is booming, along with the number of coffee shops and presence of global chains such as Starbucks (USA), Costa Coffee (UK), SPR and UBC Coffee (the latter two being Taiwanese). Foreign companies continue to expand their presence through acquisitions and joint ventures. Nestlé recently acquired Yinlu Foods and Hsu Fu Chi. Mengniu and Arla have signed a framework agreement for investment in a dairy technology cooperation centre.

4.3.6 Processed Foods – Rest of Asia

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Rest of Asia 3433 7.0 4929 8.6 7.5

Processed foods is an important and growing sector for corrugated in ASEAN and India. Indonesia is currently the largest and fastest growing market for packaged food and drink in ASEAN, while Malaysia and Singapore have the most developed markets. Exposure to western style culture and cuisine is encouraging a move away from traditional diets to dairy products, meat and eggs. Convenience foods, such as ready meals, frozen foods, sauces and dressings are becoming increasingly popular as lifestyles change with urbanisation, greater affluence and an increasing number of single person households. Smaller households are driving a trend to smaller pack sizes, which are also popular amongst low income consumers who may not be able to afford larger pack sizes. In Indonesia, fast growth is reported in baby foods, canned foods, dried foods, frozen foods, meal replacements and soup. In Thailand, dried foods and ready meals offer the best growth potential, while in Malaysia sectors performing well include meal replacements and pasta. In Singapore, breakfast cereals, dairy products, snack bars, instant noodles and sandwiches are all showing robust growth.

In India, only 6% of perishables in India are processed giving significant scope for expansion in processed foods with a growing middle class, rising incomes, rapid urbanisation and a young population. Supply side improvements will help to drive this trend.


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Growth prospects are attracting inward investment by multinationals such as Unilever, Kraft and Nestlé.

4.3.7 Processed Foods – Central and South America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

C&S America 4779 9.7 5622 9.8 3.3

Brazil accounts for almost 60% of the market for corrugated for processed foods in Central and South America and after the oil industry, food and beverage processing is the second largest industry in Brazil. The most important sectors in order of size are meat, coffee, dairy, oil and fats, canned fruit and vegetables and chocolate confectionery. The biscuits sector is showing particularly strong growth, with recent inward investment by major multinational producers. Most of the larger, more industrialised countries in Central and South America are seeing strong growth in demand for packaged goods, fuelled by population growth, growth in incomes, and, in particular, the emergence of a middle class demanding more sophisticated packaged food products. The major exception is Chile, where the processed food market is maturing, and there is not such a strong young element in population growth. The strong growth in mass grocery retailing outlets in these countries is generating above average growth in demand for Retail Ready Packaging, but the continued importance of street markets and corner shops is a limiting factor. Brazil, Chile and, to a lesser extent, Columbia are also expanding their exports of processed foods to North America, Europe and, increasingly, the Far East. Overall, we expect demand for corrugated for processed foods to be above average in Central and South America, compared with the overall growth of corrugated within the region.

4.3.8 Processed Foods – Other Regions

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Other Regions 3218 6.5 3796 6.6 3.4

In Oceania, packaged foods consumption has remained resilient during the economic slowdown, with less eating out and more eating in the home, offsetting more constrained spending. Convenience and health are key factors underpinning demand. Private label brands are increasing their share. In South Africa, volume growth in packaged foods sales is higher than value growth, due to price-based promotional activities. Increasing demand for convenience will influence product formats. Global players are increasing investment in manufacturing in canned fruits and vegetables, dried fruit, dairy products and bakery products.


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Expansion of supermarkets and hypermarkets in the Middle East is boosting sales of packaged foods while increasing price competition. Efficient cold chain distribution and storage infrastructures are helping to promote sales of frozen and chilled foods. Saudi Arabia is actively promoting inward investment in processed food operations by major companies in a bid to develop a broader food manufacturing base.

4.4 Drinks

4.4.1 Drinks – Global Summary Products included: Beer and soft drinks

Wines and spirits

Liquid milk and fruit juices

END USE MARKET PROSPECTS FOR CORRUGATED – DRINKS – 2011, 2016

MSM, % SHARE

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 2777 13.3 3061 11.9 2.0

Western Europe 3579 17.2 3773 14.7 1.1


Sub Total Europe 4717 22.6 5084 19.8 1.5

Pacific Rim 3279 15.7 3472 13.5 1.1

China 5276 25.3 7674 29.9 7.8

Rest of Asia 2888 13.9 4141 16.1 7.5

Sub Total Asia 8163 39.2 11815 46.0 7.7

Central & South America 470 2.3 544 2.1 3.0

Other Regions 1434 6.9 1698 6.6 3.4

World 20840 100.0 25673 100.0 4.3

Demand for corrugated in drinks markets is set to grow at an average 4.3% p.a., well above the growth for corrugated in total. The various sub sectors of this market, notably beer and soft drinks, are of course subject to weather patterns. Notwithstanding this, spirits and beer are losing share in both developed and emergent markets, whilst wine and soft drinks are increasing share. In the important soft drinks sector, emphasis on healthy drinks and increasing concerns over dietary issues are creating strong growth in low calorie drinks and bottled water, stimulated further by government taxes on high sugar content drinks in the USA and Europe. Niche products such as energy drinks, ready-to-drink teas, vegetable juices and low alcohol content beers offer good growth potential but from a low base.


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Moves to shrinkwrap in some regions such as North America are creating some downward pressure, but overall these markets continue to offer good growth for corrugated. The share of the drinks market held by the emerging regions of the world currently stands at 52.0%. The relatively low share held by the developed regions is influenced very much by the North American market which represents only 13.3% of all the corrugated used for drinks. Over the next 5 years, the Asia Pacific region will contribute a substantial 49.6% of the additional business forecast as indicated below.

END MARKET PROSPECTS FOR CORRUGATED – DRINKS


Region Msm %





Pacific Rim 193 4.0

China 2398 49.6





World 4833 100.0

4.4.2 Drinks – North America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 2777 13.3 3061 11.9 2.0

The growth in demand for corrugated in the North American drinks market is expected to be slightly above average between 2011 and 2016, due partly to some recovery from poor market conditions for beer and carbonated soft drinks in Canada and the US in 2011. Beer dominates all three North American alcoholic drinks markets, but is losing share to wine throughout the region. US beer production dropped in both 2011 and 2012, and Canadian production is also virtually static. In Mexico, beer accounts for almost 80% of alcoholic drinks consumption, and continues to grow as a result of a rising population and income levels. Wine is increasing its share of the alcoholic drinks market throughout North America. The US is the fourth largest wine producer in the world, and consumption and exports are growing steadily. Consumption in Canada is also increasing, but imports are gaining share and now account for more than half of consumption. Wine consumption is much lower in Mexico – less than 3% of the alcoholic drinks market, but is growing rapidly.


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Spirits are losing share throughout the region. The carbonated soft drinks markets in Canada and the US are fiercely competitive. The market leaders continue to focus on the development of functional and diet drinks to stimulate demand. A number of US states and municipalities have introduced ‘soda taxes’ in response to growing concerns about obesity and links to sugar based drinks. Bottled water and juices are gaining share throughout the region, but, in both the US and Canada, there have been further moves to lighter weight packaging and shrinkwrapping for bottled water.

4.4.3 Drinks – Europe

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Europe 4717 22.6 5084 19.8 1.5

Sales of alcoholic drinks in Europe are influenced by health concerns and public policy. These issues are resulting in rising duties and debates over minimum pricing per unit of alcohol. This is particularly the case in Eastern Europe where, in Russia, the minimum price of vodka will increase by around 60% over the new two years. As a result, the prospects for corrugated in the European drinks industry are slightly below average. Production of wine increased marginally last year, with a decline in domestic consumption offset by a modest increase in exports. Beer sales are suffering from an apparent move from high quantity/low cost products to more expensive drinks sold in smaller quantities. However, this trend is offset by a move towards packaged beers for take-home consumption. Sales of soft drinks, whilst particularly dependent on weather patterns, have seen only marginal growth, with significant downgrading to larger format economy packs. The introduction of sweet and soft drinks taxes in France and Denmark will impact future demand levels, particularly if this trend spreads to other European countries.

Niche speciality products such as energy drinks and iced tea offer the best growth potential, whilst sugar-free formulations continue to steadily increase share. Sales of juices are flattening off as a result of high fruit juice prices, notably in Germany, which accounts for 25% of European consumption. Sales of liquid milk are stable, despite widespread price reductions arising out of over supply.


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4.4.4 Drinks – Pacific Rim

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Pacific Rim 3279 15.7 3472 13.5 1.1

Moderate growth in non alcoholic beverage consumption is forecast across the Pacific Rim. Growing interest in healthy eating has helped to drive up sales of health drinks including bottled water, vegetable juices and bottled green tea. In Japan, the earthquake had a positive impact on soft drinks demand during 2011, with concerns over radiation leading to significant growth in bottled water demand. In South Korea and Taiwan, there is a trend towards premium products and increasing consumption of bottled carbonated water. Japanese beer sales have been dampened by health concerns and consumption is declining by about -1.0% p.a. Brewers have responded by introducing sugar free beers low malt beer. Rapid growth is also expected in non-alcoholic beers, which grew by 50% in 2011. Consumption of beer in South Korea and Taiwan is growing by 1% p.a. with an increasing share of imported premium beers. Wine sales are expected to gain as wine becomes more affordable.

4.4.5 Drinks – China

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

China 5276 25.3 7674 29.9 7.8

Demand for soft drinks continues to grow rapidly, with changing tastes, rising incomes and dynamic development of healthy beverages such as ready-to-drink tea, fruit/vegetable juices and bottled water. Less healthy soft drinks such as carbonates, however, and are not performing so well. Detection of plasticiser in some soft drinks in Taiwan in May 2011 had a short term negative impact on Chinese sales. Leading players are actively seeking acquisitions and mergers. In March 2012, PepsiCo entered into an alliance with local food and beverage company Tingyi, swapping bottling operations for equity, and gaining access to Tingyi’s distribution network. In 2011, Nestlé acquired a majority stake in Xiamen Yinlu Group, a producer of speciality drinks. Hangzhou Wahaha is reported to be looking for global acquisitions to build overseas drinks distribution networks.

China’s beer market is growing at a steady rate, with targeted sales of 51.5 million kilo litres in 2012. In 2011, Road Traffic Safety law amendments were introduced to address problems with drink driving, which will impact mainly on on-trade beer sales. The market is extremely price competitive and very low margins will encourage consolidation to improve profitability. China is the world’s largest importer of wines from the French Bordeaux region. Wine and spirits consumption is influenced by the desire to demonstrate wealth and sophistication. Internationally established brands rather than local producers will continue to benefit from this.


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4.4.6 Drinks – Rest of Asia

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Rest of Asia 2888 13.9 4141 16.1 7.5

Robust growth continues in the soft drinks sector across most countries, in particular Indonesia, Thailand and the Philippines. Branded functional, sports and dietary drinks are benefiting from the growth of middle class consumers. Health concerns are driving up sales of fruit and vegetable juices, functional drinks and bottled water. In India, carbonated drinks are gaining popularity with innovation in pack sizes making products more affordable. In the Philippines, wine consumption is gaining share from beer. Strong growth is forecast for beer consumption in India and Vietnam, while in Thailand growth will be limited by government efforts to cut alcohol consumption. Sales of alcoholic drinks in Pakistan, Indonesia and Malaysia are limited by their Muslim populations. Alcoholic drinks are often aspirational purchases and rising incomes as well as reductions in import tariffs will make imported brands more affordable. Vietnam is benefiting from inward investment including PepsiCo of USA, Kirin of Japan and Carlsberg’s acquisition of Hanoi Beer and Beverages.

4.4.7 Drinks – Central and South America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %


Brazil accounts for 60% of corrugated consumption for drinks in Central and South America, slightly higher than its share of processed foods. Beer is by far the largest Brazilian alcoholic drink market followed by spirits, but consumption of wine is growing strongly. Beer production was up by more than 3% in 2011, reinforced by a number of investments by major players. Smaller local brewers are losing share to the major national brands, and premium brands are gaining share. However, on the downside, imports are increasing their share of the market, and sales of both beer and soft drinks have also been affected by the withdrawal of a Federal tax exemption in 2011. Beer sales in Chile and Argentina increased by 4% in 2011, assisted by the particularly warm summer weather. Again, premium beers are gaining share. A leading brewery in Argentina has recently launched a non-alcoholic beer. Exports of wine from Brazil have continued to grow strongly, but Argentine exports of bottled wines have suffered both from the effects of inflation on competitiveness, and sluggish European markets. There has been little sign of any improvement in 2012, following a -2.0% drop in 2011.


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In Chile, wine consumption has been falling for years, and the industry has not recovered from the effects of the recession and the earthquake in 2010. Bottled wine exports from Chile were also down by about -3.0% in 2011, but exports of wine in bulk to China are increasing.

Sales of carbonated soft drinks in 2011 slowed in Brazil, and actually fell by -1.0% in Argentina, but the market in Chile has continued to grow. In all three countries, growth prospects are better for juices, bottled water, low calorie and functional drinks. Recent investment in beverage can production is likely to result in an increase in the share of lighter weight packaging and a growth in shrinkwrapping, but in Argentina the lack of investment funds for new filling lines is providing some protection from pack substitution.

4.4.8 Drinks – Other Regions

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Other Regions 1434 6.9 1698 6.6 3.4

In Oceania carbonated drinks are losing share to bottled water, non carbonated health and sports drinks. Ready-to-drink tea products are also performing well. Growth is affected by the economic outlook, with consumers being more cautious in their buying habits during the slowdown. Soft drinks consumption in South Africa slowed during 2011 as sales of carbonated drinks fell back, following inflated growth in 2010 due to the world cup competition. Constraints on spending and health concerns have encouraged a switch to tap water. Rising penetration of supermarkets into rural areas will help to drive growth in the future. Increasing health consciousness is influencing soft drinks consumption in Saudi Arabia with growing demand for bottled water, fruit juices, and low calorie carbonated beverages. Australian beer consumption is falling due to health concerns and stricter drink driving laws. Low alcohol and premium imported beers are gaining share. Wine consumption increased by 2% in 2011/12, helped by low prices and abundant supplies. New Zealand is following a similar trend with declining beer consumption, an increase in the share held by imported premium beer and a switch to wine consumption. Wine exports from Australia in 2012/13 are expected to reach 712 million litres, slightly up on the previous year but lower than in 2010/11. A growing proportion of wine is shipped in bulk, with bottled wine now accounting for just 50% of total exports. Total alcoholic drinks consumption in South Africa was 3.8bn litres of which 3bn litres was beer. Consumption is growing by around 2.0% per annum, with all sectors showing positive gains.

South African wine production in 2012 is estimated at 872.2mn litres, up 41mn litres from 2011. While most is sold in bulk, bottled wine sales are reported to have performed well in the first three months of 2012, with increasing volumes shipped to East Africa, Russia and Japan.


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4.5 Non-Food Consumables

4.5.1 Non-Food Consumables – Global Summary

Products included:

Health and beauty products

Household products, including detergents and cleaning materials

Pet foods

Cigarettes and tobacco

END USE MARKET PROSPECTS FOR CORRUGATED – NON FOOD CONSUMABLES

2011, 2016 MSM, % SHARE

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 5849 29.3 6347 26.7 1.6

Western Europe 3325 16.7 3730 15.7 2.3


Sub Total Europe 4338 21.8 4915 20.7 2.5

Pacific Rim 2051 10.3 2150 9.0 0.9

China 2980 14.9 4269 17.9 7.5

Rest of Asia 2114 10.6 3033 12.7 7.5

Sub Total Asia 5094 25.5 7302 30.7 7.5


Other Regions 1192 6.0 1398 5.9 3.3

World 19937 100.0 23798 100.0 3.6

Corrugated demand in non-food consumables markets is forecast to grow at 3.6% p.a., in line with the total corrugated market. Health and beauty products offer the most promising growth driven by aging populations, increased spending on health insurance and increased government spending on health care. Global pharmaceutical companies are currently contending with a large number of drugs coming off patent, creating increased cost pressures and a drain on resources. In the household product sector, demand is growing marginally but is suffering from brand downgrading and concentration of detergent and dishwashing formulations. The global cigarettes and tobacco sector is in long-term decline, for obvious reasons, but corrugated demand continues to increase in some Asia Pacific countries, notably India. Emergent markets account for only 39.6% of corrugated demand in this sector, but this is forecast to grow to 44.6% by 2016.


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As with other markets, the Asia Pacific region will contribute the bulk of the additional demand forecast over the next 5 years, estimated at 59.8% of the total.

END MARKET PROSPECTS FOR CORRUGATED – NON-FOOD CONSUMABLES – 2011 TO 2016 INCREMENTAL BUSINESS

MSM, % SHARE

Region Msm %





Pacific Rim 98 2.6

China 1289 33.4





World 3861 100.0

4.5.2 Non-Food Consumables – North America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 5849 29.3 6347 26.7 1.6

Non-food consumables account for almost 15.0% of North American corrugated consumption, but toiletries, cosmetics and household care products have been particularly subject to pressure from retailers and packers to reduce packaging costs and weights. The continued increase in share of more concentrated detergents and household care products is also reducing the amount of packaging required. Canadian manufacturers have been adversely affected by the high exchange rate of the Canadian dollar compared with the US dollar; conversely, supplies of toiletries and home care products across the Mexican border are increasing as a result of the lower peso exchange rate. There has been a modest recovery in pharmaceuticals production in the US. Growth had dropped to below 3% p.a. in 2008 and 2009, influenced by the impact of job losses on the number of people covered by health insurance. The growth rate was back to 6% in 2011 but cost pressures will continue to intensify as a number of major drugs come off patent. Generics account for about 80% of the market and nine of the worlds top ten generic drug manufacturers are US based. The Canadian and Mexican pharmaceuticals markets are primarily supplied by imports. Consumption of cigarettes and tobacco in the USA and Canada continues to decline.


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Over the past few years, Mexico has increased the amount of land devoted to tobacco cultivation, as large multinationals have relocated production from Canada to Mexico, but local consumption is declining due to health concerns, and smoking has been banned in public places since 2008.

4.5.3 Non-Food Consumables – Europe

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Europe 4338 21.8 4915 20.7 2.5

Sales of pharmaceuticals continue to grow steadily, as a result of an aging population and increased consumer concerns over health issues. Currently, the total healthcare sector in Europe is swallowing up 10.5% of GDP, compared with 9.6% 5 years ago. Pressure on health systems by governments and insurers is resulting in some price cuts as well as continued moves towards generic drugs. However, the main issue facing the European pharmaceutical sector is the large number of products going off patent, so R&D expenditure will continue to create a drain on resources. The cosmetics and toiletries sector will continue to offer steady growth, with more dramatic growth evident in Central and Eastern Europe. Demand for cleaning products is growing marginally, with most of the growth in the dishwashing sector, with demand for laundry products remaining flat.

Brand leaders report a significant down trading from premium products to mid-market and bargain-basement offerings. Overall, a steady move towards concentrates is impacting corrugated volumes, which continue to grow slowly. The European cigarettes and tobacco industry is in long-term decline, influenced by repeated substantial increases in tobacco taxes, growing health consciousness, smoking restrictions in public places, and advertising bans.

4.5.4 Non-Food Consumables – Pacific Rim

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Pacific Rim 2051 10.3 2150 9.0 0.9

In Japan, an aging population is underpinning a trend to anti-aging cosmetics and toiletries and other products targeting older people. Health concerns are also driving a trend to natural ingredients. Strong growth was recorded for cosmetics sales in South Korea during 2011 with fashion being a major influence on the market through styles and branding.


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Japanese sales of home care products continued to increase in 2011. Hot summer weather resulted in higher purchases of home insecticides. Liquid detergents exceeded powder detergents sales with growing use of frontloading washing machines, and a spate of new product launches. In Taiwan, the market for homecare products is showing moderate growth, while in South Korea concerns over dust influx from Japan following the earthquake have led to an increase in sales of personal hygiene products. Across the Pacific Rim, an aging population and increasing incidence of diet-related health problems, such as obesity and heart disease, are driving up healthcare and pharmaceuticals spending. However, weak economic growth is slowing this trend. There is increasing pressure for cost and political reasons to shift to generics away from branded products. In Japan, competitive pressures are encouraging consolidation amongst pharmaceuticals producers. In Japan, health concerns, government anti-smoking policy and tax rises contribute to the decline in demand for tobacco. In Taiwan, there is a shift to low-tar cigarettes and taxes on tobacco are rising. South Korea remains one of the world’s largest smoking populations and attempts to reduce consumption are proving difficult.

4.5.5 Non-Food Consumables – China

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

China 2980 14.9 4269 17.9 7.5

In China, cosmetics and toiletries demand is also benefiting from high growth in disposable incomes. Foreign companies, such as L’Oreal (USA) and Shiseido (Japan), are exploiting their strong brand positioning at the higher end of the market. Pharmaceutical sales are expected to double over the next 5 years, with rises in private spending alongside government spending on healthcare reforms. Local companies are consolidating as a result of government action to concentrate the domestic pharmaceuticals distribution systems. Tougher negotiating by the government with foreign pharmaceutical producers will put pressure on margins. Multi national pharmaceuticals companies, such as Pfizer, are collaborating with local generics producers, such as Zhejiang Hisun Pharmaceuticals, to supply generics which currently have a market share of over 25%. High growth in sales of household cleaning products are driven by rising income in urban and rural areas, greater hygiene awareness and changing lifestyles demanding increased convenience. Toilet care, air fresheners and surface cleaners are becoming increasingly affordable amongst affluent consumers who are expected to trade up to mid and premium products as affluence grows.

Tobacco consumption will be influenced by growing awareness of health risks and stricter regulation but despite this cigarette consumption is expected to continue to increase.


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4.5.6 Non-Food Consumables – Rest of Asia

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Rest of Asia 2114 10.6 3033 12.7 7.5

Healthcare spending in Asia has been lagging economic growth, but is still expected to rise sharply over the next five years. Key growth drivers are rising personal incomes, increasing incidence of chronic diseases and growth of hospitals and clinics. A number of countries in the region are trying to promote the use of generics over patented drugs, which will support local industry and help to reduce costs. Singapore is an important producer with a strong established biomedical sector. In India, generic drug production is an important sector and as the number of drugs coming off patent falls, merger and acquisition activity is expected to increase. Pressure on India to tighten drug patent and licensing laws is increasing, as major foreign drug companies seek to exploit growth potential in the Indian market. Multi nationals including Unilever and P&G are benefiting from strong growth in demand for cosmetics and toiletries across Asia through investment in local facilities. In many parts of the region, these products are becoming viewed as less of a luxury so providing resilience during economic downturns. L’Oreal recently opened a major factory in Indonesia – their largest one in the group, to take advantage of the fast growing local beauty products market.

Demand for household cleaning products will continue to grow as affluence rises. The trend to smaller households will increase demand for smaller pack sizes. Investment by major multinationals such as Kao Corporation of Japan will underpin their presence in the region. Tobacco consumption remains strong in many of the less developed countries of the region but is expected to moderate as action to stem smoking takes effect. Tobacco is a particularly important corrugated sector in India and local respondents anticipate continued growth here, despite the various issues impacting on final demand. Vietnam has been identified as a potential long term high growth market for cigarettes and tobacco, due to its population size, growing wealth and an apparent lack of social stigma attached to smoking.

4.5.7 Non-Food Consumables – Central and South America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %


Brazil accounts for almost two thirds of the consumption of corrugated for non food consumables in Central and South America. However, the other more industrialised countries in the region are also showing strong growth, from relatively low per capita consumption levels, driven by rising populations, rising incomes and the growth of the consumer middle class. This particularly applies to the personal care market.


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Brazil is the largest pharmaceutical market in Latin America, but per capita spending on pharmaceuticals is only about half the level in Mexico, and 5.0% of the US level. Brazil is a net importer of pharmaceutical products but a strong local manufacturing base is emerging. Despite a tighter pricing environment, strong growth is expected to continue, reinforced by inward investments by global players targeting the Brazilian pharmaceutical market. In general, other Central and South American markets are dominated by imports. Most products in this sector are showing above average growth, in relation to total corrugated consumption.

4.5.8 Non-Food Consumables – Other Regions

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Other Regions 1192 6.0 1398 5.9 3.3

In Oceania, demand for cosmetics and toiletries – in particular luxury items – will soften due to weak consumer confidence, but will pick up as the economic outlook improves from 2014 onwards. In the Middle East and North Africa, the beauty and personal care sector is growing in most product categories with cosmetics performing particularly well. UAE and Saudi Arabia are attracting the world’s leading beauty care retailers and manufacturers. In the Australian household products sector, brand extensions and product launches that save time, combine functions and make life easier are adding market value, while private labels are competing hard to reduce the strength of major premium brands. In New Zealand, the focus has been on health, with growth of chemical free and natural products, along with formula concentration. In the Middle East, inward investment by multinationals is expanding regional production of household products. Pharmaceuticals sales in Oceania are rising as demand for healthcare increases and the population ages, with the share held by generics on the increase. Growing population and health awareness will drive up demand for pharmaceuticals in the Middle East and Africa. Income growth and government healthcare policies both play an important role, but currently local manufacturing is fragmented and geared to generics.

Less than 20% of the Oceania population now smoke and further reductions in the number of smokers are expected with tough government legislation. In the Middle East and Africa, however, tobacco consumption is growing, with increasing uptake amongst the younger population.


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4.6 Fresh Foods

4.6.1 Fresh Foods – Global Summary

Products included:

Fruit and vegetables

Fresh meat, poultry and fish

Flowers, including cut flowers and pot plants.

END USE MARKET PROSPECTS FOR CORRUGATED – FRESH FOODS/PRODUCE 2011, 2016

MSM, % SHARE

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 2988 18.7 3455 18.7 2.9

Western Europe 3041 19.0 2995 16.2 -0.3


Sub Total Europe 3344 20.9 3323 18.0 -0.1

Pacific Rim 3256 20.3 3441 18.6 1.1

China 1762 11.0 2402 13.0 6.4

Rest of Asia 1012 6.3 1459 7.9 7.6

Sub Total Asia 2774 17.3 3861 20.9 6.8


Other Regions 941 5.9 1076 5.8 2.7

World 16013 100.0 18454 100.0 2.9

Corrugated demand is forecast to grow over the next 5 years at an average 2.9% p.a., well below the average for corrugated as a whole. Fresh fruit and vegetables account for the bulk of corrugated demand in the fresh foods sector. Accordingly, output and corrugated use is subject to the vagaries of the weather, which has affected harvests in North America, Europe, Asia, Central and South America and Oceania. Corrugated will continue to take business from wooden containers in fruit and vegetables markets, but will lose marginal business to reusable plastic crates (RPCs) in most regions, with the exception of North America. The fresh meat, poultry and fish sector consists of packaging used for cutting and boning plants, freshly prepared meat products (including sausages and bacon), poultry and fish. Very little corrugated is used in cutting and boning plants because of problems with lack of moisture resistance and this is also applies to the wet fish sector.


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For this reason, most of the corrugated demand is concentrated on the pre-packed and fresh prepared meat and poultry sectors. Emerging markets account for 41.1% of the total, but this will increase to 49.6% over the next 5 years, and the Asia Pacific region will generate 52.1% of the incremental business forecast to be generated. The share contributed by North America to this additional business will be the highest across all market sectors estimated at 18.9%, compared with 8.8% of corrugated as a whole.

END MARKET PROSPECTS FOR CORRUGATED –

FRESH FOODS/PRODUCE – 2011 TO 2016 INCREMENTAL BUSINESS MSM, % SHARE

Region Msm %


Western Europe -46 -1.9


Sub Total Europe -21 -0.9

Pacific Rim 185 7.6

China 640 26.2





World 2441 100.0

4.6.2 Fresh Foods – North America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 2988 18.7 3455 18.7 2.9

The USA is a net importer of fresh fruit and vegetables, but is also a significant exporter of apples, oranges & tangerines, berries, lettuce and grapefruit. In general, harvests were average in 2012, but apple and peach harvests were severely affected by the warm winter followed by frosts. Citrus crops in Texas have been hit by the drought, but harvests in California and Florida were average. Imports of strawberries, avocados, table grapes and tomatoes are increasing share in the US market, and these are an important growth driver in the Mexican corrugated market. However, since the trade in these products is primarily within North America, its effect on the regional corrugated growth is small. Canadian harvests have generally been less volatile than those in the US, although the Ontario apple crop was hit by an unseasonably warm winter followed by frosts, and storm


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damage in July has affected cherry and peach yields. Other harvests, including salad products, have been normal.

The fresh meat market in the US is expected to show an increase in the second half of 2012, due to animals being slaughtered early because of high feed prices and dried out grasslands. A corresponding dip is expected in 2013. Beef production is primarily affected by the poor grazing, while pork is more affected by the high feedstuff prices. Overall, we expect an above average increase in corrugated shipments over our forecast period. The general trend in all three countries towards healthier eating and fresher foods will be reinforced by a modest net gain against returnable wood and plastic containers.

4.6.3 Fresh Foods – Europe

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Europe 3344 20.9 3323 18.0 -0.1

As in other regions, demand for corrugated in European fresh foods markets is subject to the vagaries of the weather. This year in particular has seen poor crop yields with high temperatures causing many fruit and vegetables to stop growing and ripen early. Italy was hit by its worst drought in nearly 10 years, but several other countries, including Benelux, France, Scandinavia, Central Europe and Russia, were also badly hit. Flowers, salad vegetables and the repacking of imported produce are offering good growth potential. However, longer term prospects for corrugated in fruit and vegetables markets will suffer from the continued penetration of reusable plastic containers (RPCs). Most of the corrugated in the fresh meat, poultry and fish sector consists of packaging for fresh prepared meat products (including sausages and bacon), poultry and fish.

4.6.4 Fresh Foods – Pacific Rim

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Pacific Rim 3256 20.3 3441 18.6 1.1

Per capita consumption of fruit & vegetables and meat & fish is increasing steadily across the region. In South Korea, compulsory packaging of agricultural products has increased demand for corrugated packaging. The importance of the pork industry and concerns of meat containing growth hormone ractopamine in Taiwan has lead to strong opposition to the easing of meat import restrictions from the USA and this is adversely influencing exports and output.


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4.6.5 Fresh Foods – China

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

China 1762 11.0 2402 13.0 6.4

In China, high food inflation, lack of cold chain logistics and quality control continue to present problems to the fresh foods sector. As a result, this sector will continue to suffer from rising input costs and supply problems, as greater affluence leads to rising per capita consumption of meat, fish and produce. Cost issues are driving a trend to direct sourcing from the farm by local retailers, a practice which is already common among foreign supermarkets. Currently, only around 15% of food, meat and vegetables is transported via the cold chain in China, and development of cold chain logistics will be key to reducing food decay in transport, increasing availability and improving quality standards. Water resources are a major challenge to the industry with extreme weather such as the drought in 2010 having a major impact on output.

4.6.6 Fresh Foods – Rest of Asia

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Rest of Asia 1012 6.3 1459 7.9 7.6

India is the world’s largest milk producer and second largest producer of fruit and vegetables. Developments to improve production and the supply chain over the medium term offer huge potential to corrugated packaging along with competing alternatives such as RPCs. In Indonesia, the government is promoting the planting of staple food crops – in particular rice – in a bid to restore national self sufficiency in food, and to limit the shift to more lucrative cash crops such as coffee and cocoa. The Philippines banana industry has been affected by new regulations for fresh produce imports in China, and a resulting fall in demand for banana boxes is expected to be reversed next year. Thailand is an important exporter of agricultural products, but flooding in 2011 caused extensive damage to rice crops.

4.6.7 Fresh Foods – Central and South America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %



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Almost 22% of corrugated shipments in Central and South America are for fresh foods and produce – by far the largest share globally. A third of this total is for banana exports, primarily from Ecuador, Colombia, Central America and the Caribbean and a further 8% is for tropical fruit exports from the same countries and from Brazil and Argentina. But Brazil, Chile and Argentina are also major consumers of corrugated, both for fresh fruit and vegetables, and also for meat and poultry. Taking the region as a whole, the banana market is growing at 1–2% p.a., but there are fluctuations each year, due partly to harvest variations across the region as a whole, and also to difficult trading conditions in the various exporting countries. In 2012, exports of bananas from Ecuador have been poor, influenced by an outbreak of Sikatoka disease, but also to weaker demand from European export customers; this also affected Colombia, the other major supplier of bananas to the European market. In contrast, banana exports from Costa Rica, Guatemala, Peru, the Dominican Republic and Honduras have fared better. Overall, exports of tropical fruit are increasing faster, at 2– 3% p.a. During 2011, Costa Rica consolidated its position as the world’s leading exporter of fresh pineapples, with export sales, primarily to the US and Europe, increasing by 8% compared with the previous year. The potential for further growth from Costa Rica will be restricted by production constraints but other countries, such as Guatemala, are growing their pineapple exports. Exports of fruit from Brazil and Argentina fell in the first half of 2012. In Brazil, the principal reason was flooding early in the year, which affected the papaya and mango crops. Heavy early frosts in southern Argentina hit apple and pear crops, but Argentine citrus fruits were also less competitive in export markets, due to the high inflation rate and fixed exchange rate. Argentina also suffered weak demand in Europe, its main export market. Fruit exports from Chile were also down overall, but growth in the citrus, avocados and kiwi fruits helped to offset the decline in other products, notably table grapes. Brazilian corrugated suppliers report small gains from wood and plastics in the domestic market for fruit packaging due to customers’ recognition of the benefits in terms of logistics costs and hygiene. However, wood remains plentiful and cheap, and no major breakthrough is anticipated. In Chile, efforts to develop new export markets are resulting in a reduction in the market share of corrugated, because Asian and Middle Eastern customers are showing a preference for wood and plastics packaging rather than corrugated. Brazilian exports of poultry and pork have benefited from recently more favourable exchange rates, although the knock on effects of the US drought and higher feed costs will adversely affect the competitive position of Brazilian exporters in 2013. Chilean exports are also showing strong growth, and Nicaragua is developing a growing presence in the world market. However, Argentine exports have been poor, due to the impact of the high domestic inflation rate on costs.

4.6.8 Fresh Foods – Other Regions

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Other Regions 941 5.9 1076 5.8 2.7


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Australian domestic per capita consumption of vegetables & fruit and meat & fish is growing at a steady rate. Production of livestock and livestock products, an important export sector, has suffered from droughts and, more recently, from floods. More favourable weather is needed to help the industry recover. In New Zealand, greater concern for health has raised demand for fresh agricultural products and poultry, while demand for dairy products and red meat has declined. A free trade deal with China is boosting exports of some products. The volume of Chinese investment in production of fruit and vegetables in Africa is increasing with the aim of creating a well developed agricultural infrastructure, designed to make the region a major player in food supply to China and this is expected to stimulate demand for both corrugated and reusable plastic containers.

4.7 Domestic Appliances and Electrical Goods

4.7.1 Domestic Appliances and Electrical Goods – Global Summary

Products included:

White goods

Brown goods

Small electrical appliances

Consumer IT and telecoms products

END USE MARKET PROSPECTS FOR CORRUGATED – DOMESTIC APPLIANCES AND ELECTRICAL GOODS

2011, 2016 MSM, % SHARE

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 1274 6.6 1415 6.0 2.1

Western Europe 1888 9.9 1855 7.9 -0.3


Sub Total Europe 2482 13.0 2590 11.0 0.9

Pacific Rim 2019 10.5 2192 9.3 1.7

China 9363 48.9 12080 51.2 5.2

Rest of Asia 3326 17.4 4505 19.1 6.3

Sub Total Asia 12690 66.2 16585 70.3 5.5


Other Regions 391 2.0 451 1.9 2.9

World 19160 100.0 23599 100.0 4.3

Use of corrugated for domestic appliances and electrical goods is forecast to grow at an average rate of 4.3% p.a. over the next 5 years.


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Recent demand levels have suffered from low levels of consumer disposable income and, in most developed regions, credit restrictions and a slow down in new house starts, with a knock on effect influencing export volumes from the emergent economies. Despite this, domestic appliances and electrical goods represent one of the better growth sectors for corrugated, with significant growth coming from the consumer IT and telecoms sector. Whilst a trend towards miniaturisation is affecting packaging volumes in such high-tech sectors, end use demand continues to grow strongly. Emerging regions account for a substantial 75.0% of corrugated demand in this sector. This share will increase still further in the future, reaching 8.9% by 2016. The Asia Pacific region is forecast to account for as much as 91.7% of the additional business forecast for the next 5 years, as indicated below.

END MARKET PROSPECTS FOR CORRUGATED – DOMESTIC APPLIANCES & ELECTRICAL GOODS –


Region Msm %





Pacific Rim 173 3.9

China 2717 61.2





World 4438 100.0

4.7.2 Domestic Appliances and Electrical Goods – North America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 1274 6.6 1415 6.0 2.1

US production of domestic appliances has continued to decline, and is approximately one third lower than in 2006. However, production of small appliances was not as badly hit by the recession, and showed a modest improvement (up 1.5%) in 2011, with a further increase through 2012. Production is now back to over 90% of 2006 levels. Production of audio and video equipment is now recovering strongly, after a massive decline between 2006 and 2010.


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Production of computer and electronic equipment has continued to show healthy growth, with the exception of a dip in 2010, and is now more than 25% above the 2006 level – the largest increase of any US manufacturing sector. Medical equipment and supplies is another area showing well above average performance, with production almost 10% above 2006 levels. Canadian market trends are similar to those in the US, but Canadian manufacturers have continued to lose share in both domestic and export markets as a result of the high exchange parity of the Canadian dollar. Mexican production of home appliances, electronics and medical equipment is increasing steadily, underpinned by strong domestic demand growth, and good performance in export markets, assisted by the low peso exchange rate. There has also been further inward investment by multinationals setting up facilities, targeted at both the Mexican domestic market, and exports to the US and Latin America. Corrugated volumes for electronic products are being influenced by a strong trend to smaller products, requiring less corrugated to perform the same function. Examples include the move from desktop computers, to laptop computers, to tablets, the reduction in size of computer printers, the growth in personal and mini audio systems, and the increasing sophistication of smartphones which may replace the function of several different items (audio equipment, camera, alarm clock, GPS system, games console, etc.). Despite these trends, high growth in end user demand contributes to create well above average growth for corrugated.

4.7.3 Domestic Appliances and Electrical Goods – Europe

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Europe 2482 13.0 2590 11.0 0.9

Demand for domestic appliances across Europe is influenced by limited consumer disposable income, deteriorating personal liquidity/credit restrictions and a slow down in the housing market. Despite this, the domestic appliance market in Central Europe has benefited from inward investment and reverse business migration from the Asia Pacific regions. The consumer IT/telecom sector is showing solid growth. Volume growth will be driven by falling prices and rising obsolescence resulting from the roll-out and continued convergence of digital technology. Growth will be slower in value terms however, as strong competition keeps up the pressure on margins.

Among the markets with significant potential will be e-readers, smartphones and tablet computers, where replacement is driven by both rapid obsolescence and also deeper penetration.


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Eastern Europe is expected to remain a low-cost production centre and continues to attract business migration from Western Europe and from electronics companies located in Asia Pacific, notably Japan and South Korea.

4.7.4 Domestic Appliances and Electrical Goods – Pacific Rim

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Pacific Rim 2019 10.5 2192 9.3 1.7

Domestic appliances and electrical goods accounts for about 10% of corrugated use in the Pacific Rim with the impact of the disaster in Japan recovered in the second half of the year. Sales of domestic appliances and electrical goods in Japan during 2011 were helped by incentives to assist troubled electronics manufacturers. In 2012, conditions tightened as the domestic economy suffered a downturn. Electronics sales in South Korea are driven by rising demand and falling product prices and, recently, sales have been affected by a weak housing market. Sales of personal computers, tablets and smartphones are benefiting from product convergence, improvements to Internet services and broadband infrastructure development. On the supply side, a high valued Yen is badly affecting external and internal competitiveness for Japanese products, exacerbated in 2012 by a downturn in economic prospects in key export regions.

Following recovery from the disruption caused by natural disasters in 2011, Taiwan and South Korean producers have also been badly hit by the downturn in export sales during 2012. In Taiwan, even exports of electronics are reported to have declined by -1.7% during the first 8 months of 2012. Shipments of Ultrabooks, developed to compete with media tablets, are not performing as well as had been hoped largely because of their price, but sales of personal computers awaiting release of Window 8 operating system are expected to pickup in the second half of 2012. Orders from China for electronic components, including passive components and flexible printed circuit boards, previously dominated by Japanese companies, could be transferred to producers in other countries due to political conflict between China and Japan, a rising Yen exchange rate, and the need to diversify supply sources following the Japanese earthquake and tsunami.


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4.7.5 Domestic Appliances and Electrical Goods – China

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

China 9363 48.9 12080 51.2 5.2

In China, exporters have suffered from a downturn in global trade and the outlook remains soft for the coming year.

Domestic appliance sales have benefited from domestic spending stimuli targeting rural households, and growing disposable incomes, but moderated as government subsidies ended. Growth is expected to continue, but uncertainty over the economy could encourage consumers to delay spending decisions. Energy efficient appliances in particular are gaining popularity, despite their higher prices, due to rising electricity and water prices and supportive government policies. Air conditioner sales have performed particularly well. The consumer electronics market is forecast to grow by 9.0% in 2012, well below trend, although rising income levels and growing use of the Internet is resulting in growing demand for personal computers and other Internet-enabled devices including smartphones and tablet computers. Fierce price competition between retailers and online sellers is squeezing margins to very low levels, and retailers are establishing their own online sales presence. Foxconn and other Chinese-based producers are looking increasingly to automation and moving production inland to reduce and contain rising costs.

4.7.6 Domestic Appliances and Electrical Goods – Rest of Asia

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Rest of Asia 3326 17.4 4505 19.1 6.3

Across the ASEAN group, output of electronics and electrical goods and components has suffered significantly over the last year from poor performance in export markets, due to the Eurozone crisis, uncertainty of the US outlook and concerns over growth in China. Flooding in Thailand and the earthquake in Japan caused serious disruption of supply chains and relocation of some capacity. Philippines semiconductors and electronics production benefited from temporary relocation from Thailand. Domestic appliance sales within the emerging countries in the region have been more upbeat as incomes rise. In more developed markets such as Singapore, growth is driven by upgrades and replacement demand. Sales of flat screen TVs are underpinned by a shift from conventional cathode ray tube sets. Across the region, portable devices such as netbooks, e-readers and tablet computers are


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proving popular. Smartphones are also performing well, providing an alternative access to the internet, with personal computer penetration remaining low in many countries. Regional investment by major producers is affected by the uncertain global economic outlook but continues. In Vietnam the number of joint ventures between foreign manufacturers and local partners is increasing and includes Samsung and LG of Korea and Toshiba, Sanyo and Sony of Japan. Foxconn has major plans to invest in a mobile ‘phone factory by the end of 2012.

Countries such as the Philippines and Vietnam will benefit from some permanent relocation of pan-regional production of semiconductors and electronics out of Japan and Thailand to alleviate disruption to supply chains in the event of a natural disaster. Malaysia has identified electricals and electronics as one of 12 national key economic growth sectors for transforming the country to a high income nation by 2020 resulting in significant inward investment.

4.7.7 Domestic Appliances and Electrical Goods – Central and South America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %


The wider availability of credit, improved employment conditions, gains in real incomes and tax incentives are all stimulating strong demand for domestic appliances and electrical goods in Brazil, while the recent more favourable Real exchange rates are helping Brazilian exporters. Demand for laptop and tablet personal computers, HD TVs and smartphones is particularly strong, and Brazil’s hosting of the 2014 Football World Cup and the 2016 Olympics will buoy up demand for the latest technologies. Inward investment in tablet computers and cell ‘phones is primarily targeted at import replacement on the domestic market. Washing machines and freezers are among the household goods with low penetration rates, indicating potential for growth, assisted by government tax incentives. Corrugated suppliers see scope to gain share from EPS on environmental grounds. Demand for consumer electronics products is also growing strongly in Argentina and in Chile, which is one of the most sophisticated consumer electronics markets in Latin America. The market share of local producers is increasing in Brazil, Argentina and Venezuela, assisted by government incentives.

Among the smaller countries, Costa Rica has established a world leadership position in medical devices, with more than 20 producers.


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4.7.8 Domestic Appliances and Electrical Goods – Other Regions

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Other Regions 391 2.0 451 1.9 2.9

In the other regions, local production of domestic appliances and electrical goods is limited by the high share for imports. Limited disposable income of Australian households will restrict spending on non essential goods. However, a strong exchange rate is keeping down prices for many of these imported items. Tightening immigration policy will slow the growth of household formation, affecting demand for household appliances and other items, but labour shortages could result in a softening of immigration policy in future. In New Zealand, new product roll outs and lower prices will help to boost growth in sales of electricals and electronics, with discounted items gaining in the short term from the economic slowdown. Sales of appliances picked up during reconstruction after the earthquakes and will be boosted by a mild pick up in the housing sector over the medium term. South African consumer electronics growth is set to moderate during 2012 to 6% following buoyant growth during 2011. Strong sales in large screen TVs, and bigger ticket items such as personal computers and notebooks are boosting growth. Middle East demand for domestic appliances will be underpinned by developments in household formation, rising populations and income growth. Demand for electronics will vary depending on the stage of development and wealth of individual countries.

4.8 Durable Goods and Clothing

4.8.1 Durable Goods and Clothing – Global Summary

Products included:

Ceramics and glassware

Clothing, textiles and footwear

DIY, motor and garden products

Toys, games and sports goods

Wooden goods and furniture.


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END USE MARKET PROSPECTS FOR CORRUGATED – DURABLE GOODS & CLOTHING

2011, 2016 MSM, % SHARE

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 5467 22.7 5824 20.9 1.3

Western Europe 3418 14.2 3340 12.0 -0.5


Sub Total Europe 4190 17.4 4287 15.4 0.5

Pacific Rim 1860 7.7 1931 6.9 0.8

China 8467 35.2 10721 38.5 4.8

Rest of Asia 2244 9.3 3121 11.2 6.8

Sub Total Asia 10711 44.5 13843 49.8 5.3


Other Regions 647 2.7 700 2.5 1.6

World 24073 100.0 27813 100.0 2.9

Output in this sector is forecast to grow at a modest 2.9% p.a., well below the industry average. Most of the products in this sector in the developed regions of the world are mature and offer little scope for growth. Furthermore, the impact of “off shoring” has had a further dampening effect on corrugated prospects, although for some durables, notably furniture, there is some evidence of “re shoring”; i.e. a repatriation of activities exported off shore. Emerging markets account for quite a relatively high proportion of total corrugated demand, estimated at 53.2%, and this is forecast to rise to 57.7% by 2016. As with the domestic appliances and electrical goods sectors, the Asia Pacific region will contribute the vast bulk of the incremental business forecast, estimated at 85.7%.


DURABLE GOODS & CLOTHING – 2011 TO 2016 INCREMENTAL BUSINESS MSM, % SHARE

Region Msm %





Pacific Rim 71 1.9

China 2254 60.3





World 3739 100.0


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4.8.2 Durable Goods and Clothing – North America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 5467 22.7 5824 20.9 1.3

There are signs of an improvement in the US housing market, resulting in increased demand for furniture and fittings, both from domestic suppliers and also from Canada and Mexico. In the US and Mexico, the economic recovery has been led by durables, but, in Canada, the production of consumer durables remains very weak, due to the high parity of the Canadian dollar. Cross-border shopping is a continued concern for Canadian suppliers, as much of the Canadian population is concentrated in a narrow strip along the border. In the US and Canada, furniture production has been one of the areas hardest hit by the off shoring of production, and also by increasing inroads by imports – US production is now more than a third lower than it was in 2006. But there are now some signs of recovery in the US, with production up almost 5% in 2011. There is anecdotal evidence of some ‘re-shoring’ of high-end furniture production, by companies wishing to minimise damage in transit and improve logistics links. Production of textiles, clothing and footwear throughout North America has also been badly hit by off-shoring – US production is down by more than a third, compared with 2006. There has been a slight recovery in the US in 2011 but future growth is still expected to remain very limited. Mexican producers have also lost out to Asian competition, both in the domestic market and in export markets, notably the US. However, prospects for Mexican clothing and footwear production are now improved, helped by protective measures against Chinese imports.

4.8.3 Durable Goods and Clothing – Europe

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Europe 4190 17.4 4287 15.4 0.5

These markets are particularly vulnerable to the depressed economic conditions that Europe is currently experiencing and accordingly sales will be well below trend, particularly for big ticket purchases. However, demand is likely to recover modestly in 2014. Clothing and footwear markets will continue to face pressure from higher commodity prices and emerging market labour costs (notably in China and Vietnam). Private labels, an important and growing sub sector, tend to be sourced from the Asia Pacific region. Household durables, such as ceramics/glassware and furniture are mature sectors and are currently suffering from a downturn in the housing market. In contrast, DIY, motor and garden products continue to offer good growth but with varied regional prospects.


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4.8.4 Durable Goods and Clothing – Pacific Rim

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Pacific Rim 1860 7.7 1931 6.9 0.8

Clothing and textiles sectors have been affected by disruptions caused by natural disasters in Asia and economic problems in Europe and USA. Many leading textiles producers in Taiwan have shifted production abroad to lower cost production centres, but the government is developing textile clusters across the country to discourage this trend. A weak household sector is affecting sales of furniture in South Korea, but is expected to improve over the medium term. In Taiwan demand for luxury goods including jewellery, watches and gifts is benefiting from increasing tourism from China, where a luxury goods tax on imported items keeps prices high.

4.8.5 Durable Goods and Clothing – China

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

China 8467 35.2 10721 38.5 4.8

In China, export demand for toys and games in 2011 accelerated to 3% in 2011, despite continued weakness in developed regions, with strong growth in exports to Eastern Europe, Latin America, India and China. Expenditure on household furniture and textile products is set to slow in 2012 due to a slowdown in house sales, but will pick up again from 2013 as the market recovers. A lack of DIY culture inhibits development of retailing in this sector by western companies such as B&Q and IKEA. Expenditure on clothing and footwear is rising along with disposable incomes, with increasing focus on fashion items and luxury goods. Manufacture of low-end apparel and footwear has already moved to lower cost countries and there is increasing focus on higher value designer and branded products.

4.8.6 Durable Goods and Clothing – Rest of Asia

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Rest of Asia 2244 9.3 3121 11.2 6.8

Thai footwear producers and raw material suppliers are expected to set up new factories in Myanmar and other countries in the region. Footwear exports from Vietnam continue to grow but will be under threat from this trend. Exports within the region are growing, while major markets in Europe and USA remain sluggish.


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In India, textile output declined by around -1% in 2011/12 following strong growth in previous years; however, luggage, handbags and footwear sectors grew by 4%. Indonesia is gradually shifting its focus on raw textile exports – fibres and yarns – to finished products. In Vietnam, exports of textiles and garments rose by a substantial 38% in 2011, but are expected to perform less well in 2012. Thai garment manufacturers are reducing costs by moving to provincial areas or neighbouring countries. Indonesian furniture production has suffered from lack of investment, concerns over quality and increasing competition from China and Vietnam. Furniture exports from Vietnam are growing fast and now account for over 80% of total output.

4.8.7 Durable Goods and Clothing – Central and South America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %


Growth prospects for other durables remain very limited throughout Central and South America, with continued stiff competition from Asian suppliers in both domestic and export markets. However, there are some signs of recovery in the Brazilian textiles and leather markets, as a result of protectionist measures and the growth of the local middle class market.

4.8.8 Durable Goods and Clothing – Other Regions

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Other Regions 647 2.7 700 2.5 1.6

The share held by the durable goods and clothing sector forecast to decline steadily in the future due to limited end use demand and an increasing share of imports. In Australia, efforts to curtail spending are resulting in a shift to cheaper brands of clothing and footwear. Implementation of a bilateral trade treaty is expected to lead to a sharp rise in China’s share of imports to New Zealand. A strong Australian dollar is making imports of household goods and furniture more affordable.

In New Zealand, sales of household products fell during the first half of 2011 as a second earthquake hit. Reconstruction will encourage sales and a pick up in the housing sector whilst easing credit availability should help sales over the medium term. Demand for furniture and household textiles in the Middle East will be underpinned by the region’s growing young population and on expanding numbers of households.


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4.9 Industrial and Machinery

4.9.1 Industrial and Machinery – Global Summary

Products included:

Chemicals

Mechanical engineering and metal manufacture

Electrical and electronic components and assembly

Automotive sector, including motor spares, components and accessories

Paper, packaging and printing

END USE MARKET PROSPECTS FOR CORRUGATED – INDUSTRIAL & MACHINERY

2011, 2016 MSM, % SHARE

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 7305 16.5 7642 14.5 0.9

Western Europe 11156 25.2 11141 21.2 0.0


Sub Total Europe 13359 30.2 13854 26.3 0.7

Pacific Rim 2789 6.3 3061 5.8 1.9

China 15646 35.3 21470 40.8 6.5

Rest of Asia 2989 6.8 4268 8.1 7.4

Sub Total Asia 18635 42.1 25738 48.9 6.7


Other Regions 901 2.0 1006 1.9 2.2

World 44268 100.0 52585 100.0 3.5

Corrugated use for industrial applications is forecast to grow at an average rate of 3.5% p.a. over the next 5 years, in line with total corrugated demand. This is similar to growth in global industrial production, which is forecast to increase by 3.6% p.a. This 5-year trend does, however, hide some significant differences year on year. These differences are, in general, a reflection of trends in global levels of industrial production, although the share of the manufacturing component in the industrial production series is expected to decline steadily. Prospects for the global automotive industry are mixed. Whilst recovering in the US, automobile output in Japan and Europe is well down, resulting in high inventories and temporary shut-downs. In emerging markets, output is being encouraged by inward investment by multinationals, notably in South Korea, China and some ASEAN countries.


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Emerging markets currently account for 49.7% of corrugated demand in the industrial sector, forecast to grow to 56.0% by 2016. As in other markets, their share will continue to grow strongly, with the Asia Pacific region accounting for 88.7% of incremental business forecast for the next 5 years.


INDUSTRIAL AND MACHINERY – 2011 TO 2016 INCREMENTAL BUSINESS MSM, % SHARE

Region Msm %





Pacific Rim 272 3.3

China 5824 70.0





World 8318 100.0

4.9.2 Industrial and Machinery – North America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 7305 16.5 7642 14.5 0.9

North American automotive markets have recovered strongly over the last 2 years. US production of motor vehicles and parts increased by almost 12% in 2011 and continued to increase rapidly in the first half of 2012, but still remains almost 15% below 2006 levels. The Canadian market is less vulnerable to currency related loss of share experienced by other markets, because of the commitment of the major multinationals to production in Canada. Mexico has gained due to changing currency parities and both domestic and export sales continue to grow strongly. US production of chemicals is recovering relatively well, with the exception of pesticides and fertilisers, and production of construction materials throughout the region is benefiting from the tentative recovery in the US housing market.


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4.9.3 Industrial and Machinery – Europe

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Europe 13359 30.2 13854 26.3 0.7

Prospects in the industrial and machinery sector are reflected by recent depressed levels of industrial production. In Western Europe, industrial output is forecast to decline by -2.7% in 2012, followed by zero growth in 2013 but with some recovery anticipated from 2014 onwards. In Central and Eastern Europe, growth in industrial production is forecast to be much more positive, with output expanding by 3.2% in 2012, 4.2% in 2013 and 4.8% in 2014. The European Automotive sector has been particularly badly hit. In 2008/09, the industry benefited from massive state loans, scrap-page bonuses and other life-support subsidies. In the reality of 2012, governments no longer have such funds available and car makers are forced to shut plants and lay off workers in response to a slump in vehicle sales and in the face of every increasing inventories. The chemicals industry in Europe is currently suffering a marginal decline with weaknesses in major end use markets, notably construction and manufacturing, as well as having to deal with increasing input costs. However, better prospects are anticipated from 2014 onwards.

4.9.4 Industrial and Machinery – Pacific Rim

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Pacific Rim 2789 6.3 3061 5.8 1.9

The share held by industrial products is rising over the medium term, although a temporary fall in share is expected in 2012 owing to poor export sales. Japanese new vehicle sales for 2011 were down by nearly 20% on 2010, due to an ending of government tax breaks and new car purchasing subsidies, and the impact of the earthquake and tsunami. Despite growth of 10% in 2012, the medium term outlook for car sales is subdued due to demographic issues and rising popularity of public transport by city dwellers. Over half of Japanese produced cars are exported - primarily to the US. A strong yen exchange rate is affecting exports and encouraging outward migration of manufacturing, as well as increasing imports of components. Chinese demand is largely met through local Chinese production. The Chinese island ownership dispute with Japan is adversely affecting Japanese auto brands sold in China.

Some 4.7 million vehicles were produced in South Korea in 2011, accounting for 5.9% of world production. South Korea car makers continue to benefit from increasing demand for lower priced smaller vehicles in depressed economies. Environmentally friendly vehicles, such as electric and hybrid cars are a focus for future development. Taiwan vehicle production remains small but with a growing export sector due largely to relocation of some production from Japan by Toyota.


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Japanese core machinery orders declined -1.7% year on year in the second quarter of 2012. Recovery in external markets is hampered by an uncertain global economic environment.

While South Korea machinery sales have suffered through 2012, Taiwan’s machinery exports increased marginally by 0.2% in the first 8 months of the year. A rise in exports to SE Asian countries including Singapore, Thailand and Indonesia are credited with this modest increase. Supply chains continue to be affected by components shortages out of Japan.

4.9.5 Industrial and machinery – China

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

China 15646 35.3 21470 40.8 6.5

Growth in car sales in China slowed in 2011 as subsidies were gradually withdrawn. The China Association of Automobile Manufacturers forecasts passenger car sales growth of 11% to 16 million vehicles in 2012, while commercial sales will be down by -3% to 3.9 million units. 1.2 million vehicles will be imported and exports will be around 1 million. Sales growth will moderate after 2013 as restrictions are imposed on car use in major cities. The presence of major foreign carmakers through joint ventures with domestic firms are boosting capacity and sales, especially in western and central China. Political tension with Japan is causing disruption to Japanese automobile joint ventures located in China, and cancellations of car orders as consumers decided to boycott Japanese products. Rapid growth in the automotive components sector is driven by increasing car ownership and demand for replacement parts. As a result there has been major investment in vehicles parts manufacture by international parts suppliers such as Bosch of Germany, Delphi and Johnson Controls of the US. Growth in the chemicals industry in China is moderating. China’s 12th five year plan has as one of its main aims to upgrade the chemical industry which will encourage companies to invest, upgrade and innovate new products and processes. China’s production of industrial machinery grew by 18% in 2011. Average growth of 13% per annum is forecast between 2012 to 2016. Slower growth is the result of depressed external markets and slower economic growth as a whole. Important sectors are materials handling machinery, agricultural machinery, machine tools, and textile machinery.

4.9.6 Industrial and Machinery – Rest of Asia

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Rest of Asia 2989 6.8 4268 8.1 7.4

ASEAN and India’s automotive industry continues to grow with rising domestic demand and investment in export bases. Component supplies are also expanding to meet the growing needs of vehicle production.


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Thailand’s position as an automotive industry hub for the ASEAN region could be weakened, due to disruptions caused by natural disasters highlighting the need for more dispersed production. Countries across ASEAN including Indonesia, Malaysia, Philippines and Vietnam are adopting policies to encourage growth in automotive related production, leading to strong competition for inward investment by major auto industry players. Outward migration from China to lower cost locations offers opportunities for Vietnam, Indonesia and other low income economies. In India, small fuel efficient cars are the most popular models. Sales were dented in 2011/12 by rising inflation, high interest rates and petrol prices, but are expected to pick up in the current year. Local firms and foreign majors are increasing their investment activities. Growth is also anticipated as a base for exports of powertrain components to Europe and North America. A softening of investment across the region as producers delay or cancel projects will impact on industrial equipment sales. Investment in infrastructure development could however stimulate sales of heavy construction related machinery.

4.9.7 Industrial and Machinery – Central and South America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %


In Central and South America, the two leading automotive markets, Brazil and Argentina, continue to grow rapidly, fuelled by both domestic and export demand. The Brazilian government is stimulating domestic demand with tax concessions, preferential vehicle financing terms, and tariff protection, including some restrictions on imports from Argentina, but this does not appear to be affecting Argentine growth unduly. Automotive production in Venezuela remains depressed. Outside of the automotive sector, the remaining industrial markets for corrugated are unexciting.

4.9.8 Industrial and Machinery – Other Regions

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Other Regions 901 2.0 1006 1.9 2.2

Poor economic outlook and loss of comparative advantage in export markets is affecting automotive and components production in Australia. Saudi Arabia’s industrial clusters development programme, helping the push towards economic diversification, is expected to encompass investment in auto parts manufacturing over the medium term to longer term, subject to an adequate supply of labour.


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The Middle East is seeking to reduce its dependency on oil and gas production to diversify its economy, and to promote development of its plastics industry and downstream petrochemicals industry. Low cost feedstock gives the region a strong competitive advantage.

4.10 Other Sectors

4.10.1 Other Sectors – Global Summary

“Other Sectors” include corrugated use which cannot be attributed to a specific market sector and comprises:

Mail order/Internet shopping

Point of sale and display packaging

Gift/promotional packaging.

END USE MARKET PROSPECTS FOR CORRUGATED – OTHER SECTORS

2011, 2016 MSM, % SHARE

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 3006 30.7 3271 27.6 1.7

Western Europe 3033 31.0 3631 30.6 3.7


Sub Total Europe 3633 37.2 4429 37.4 4.0

Pacific Rim 870 8.9 1053 8.9 3.9

China 1047 10.7 1565 13.2 8.4

Rest of Asia 445 4.5 678 5.7 8.8

Sub Total Asia 1492 15.3 2243 18.9 8.5


Other Regions 420 4.3 486 4.1 3.0

World 9779 100.0 11851 100.0 3.9

Demand for corrugated is forecast to grow at an average 3.9% p.a., compared with 3.5% p.a. for the market as a whole. The main driver is mail order business linked to Internet shopping, where additional corrugated is used to provide additional packaging for subsequent delivery to the consumer. Historically, the Point-of-Sale and display sub sector has contributed to much of the growth in this “Others” sector, notably in Europe, but currently its influence is of minor importance compared with the mail order segment. Currently, the developed regions of the world account for 75.2% of corrugated consumption in this sector. This is very much a reflection of the Internet usage levels in the USA, Europe and Japan.


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Over the next 5 years, North America and Europe will contribute 51.2% of the incremental growth forecast for the next 5 years, whereas the Asia Pacific will contribute 45.2%.

END MARKET PROSPECTS FOR CORRUGATED – OTHER SECTORS 2011 TO 2016 INCREMENTAL BUSINESS

MSM, % SHARE

Region Msm %





Pacific Rim 184 8.9

China 518 25.0





World 2072 100.0

4.10.2 Other Sectors – North America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

North America 3006 30.7 3271 27.6 1.7

In the US and Canada, online retail sales (excluding travel and finance) increased by more than 15% in 2011 in the US and now hold a 5% share of total retail sales. There are now more than 30 broadband connections per 100 people in both the US and Canada. Online sales are also growing rapidly in Mexico, but broadband penetration is much lower, and below 15%. Point-of-Sale displays continue to show rapid growth in the US and Mexico, where the flexibility of a freestanding unit fits well with local flexible format retailing structures.

4.10.3 Other Sectors – Europe

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Europe 3633 37.2 4429 37.4 4.0

All the sub-sectors classified under “Other Sectors” – mail order/Internet shopping, Point-of-Sale and display packaging, gift/promotional packaging – offer particularly attractive opportunities for corrugated. However, mail order/Internet retailing offers by far the best growth potential.


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In the longer term, traditional retailers, regardless of their size or specialisation, will face increasing competition from online retailing. Low overheads, rising broadband penetration, take-up of mobile devices, increasing product choice and improved payment security will all continue to make on-line retailing more convenient and cheaper. Solid expansion is expected as e-retailing continues to progress from traditional online products, such as books, music and films, to gain a growing share of the market for groceries, clothes, holidays, consumer electronics, white goods and furniture. The main opportunity for corrugated arises out of the additional transit outer packaging that is required for distribution from the retailer/distribution centre to the consumer. In the grocery sector, corrugated has little to gain because of widespread use of plastic carriers and reusable plastic containers. However, for most other products, corrugated is used extensively and will continue to grow as the range of products marketed and distributed via on-line retailing continues to expand.

4.10.4 Other Sectors – Pacific Rim

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Pacific Rim 870 8.9 1053 8.9 3.9

High Internet penetration and popularity of smartphones offers huge potential for online and mobile shopping in Japan and South Korea. Taiwan is fast developing but is further behind, owing to problems with over regulation of e-commerce which has now been eased. South Korea is reported to be one of Asia’s fastest growing online retail sectors. In Japan, Rakuten and Amazon are the largest online retailers and local specialist online retailers are growing fast. Gift/promotional packaging is an important user of corrugated in the region, although growth is well below that of mail order/internet shopping.

4.10.5 Other Sectors – China

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

China 1047 10.7 1565 13.2 8.4

The number of Internet users in China is estimated to have exceeded 509 million by 2011, with access by mobile ‘phone being as popular as personal computer access. E-commerce is experiencing huge growth. US-based Boston Consulting Group estimated e-commerce sales will amount to Rmb2 trillion (US$335bn) by 2015, taking a 7.4% share of total retail sales. Alibaba Group is China’s top e-commerce firm, with their company Taobao being the dominant player. Foreign online retailers remain marginal players, with the exception of Amazon through its local subsidiary, Joyo.


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Point-of-Sale and gift/promotional packaging will also see good growth, but Internet shopping will continue to be the main driver in the “Other Sectors”.

4.10.6 Other Sectors – Rest of Asia

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Rest of Asia 445 4.5 678 5.7 8.8

“Other Sectors” is a small but growing sector for corrugated packaging, with online retailing forming an important source of business. Online shopping is becoming increasingly popular across the countries in this region, with the increasing popularity of smartphones and growing online presence of retailers. The current level of penetration varies between countries and is affected by access to broadband and the quality of the local infrastructure, whilst weak payment and delivery systems are also inhibiting growth.

4.10.7 Other Sectors – Central and South America

Region 2011 2016 2011-2016

% p.a. Msm % Msm %


Brazil is by far the largest online market in Central and South America. Although broadband penetration is still relatively low, at 10 broadband connections per 100 people in 2012, Brazilian consumers have readily adapted to electronic social media. Brazil is the second global Facebook market, with 46 million users, second to the USA. E-retailing is dominated by consumer electronics, and is growing by double digits every year. Elsewhere in the region, low broadband penetration and logistics issues restrict the growth potential for e-retailing. The rapid growth in mass retailing is generating strong demand for Point-of-Sale displays in the more industrialised countries. 4.10.8 Other Sectors – Other Regions

Region 2011 2016 2011-2016

% p.a. Msm % Msm %

Other Regions 420 4.3 486 4.1 3.0

E-commerce is undergoing fast growth in Oceania, encouraged by infrastructure developments supported by government. Online shopping is estimated to account for around 5% of retail spending in 2012. Convenience benefits for the rising number of single person households, more women in the workplace and opportunities for cost savings will help to drive future growth.


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Increasing provision of new payment services by government and private companies setting up electronic wallet services is facilitating development of online shopping in the Middle East and Africa, where ownership of credit cards is limited and security of payments is poor. Use of corrugated for Point-of-Sale and display applications is likely to benefit from growth in luxury retailing in Middle East countries such as Dubai and UAE, developed to attract tourism to the region.


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1.0 RESEARCH SCOPE

1.1 Regions

The report covers the same regions as last year’s edition:

North America Pacific Rim Canada Japan Mexico South Korea USA Taiwan Western Europe Asia Austria China Belgium India Denmark Indonesia Finland Malaysia France Pakistan Germany Philippines Greece Singapore Ireland Thailand Italy Vietnam Netherlands Norway Central and South America Portugal Argentina Spain Brazil Sweden Caribbean Islands Switzerland Central America Turkey Chile United Kingdom Others Central and East Europe Other Regions Czechia Oceania:Hungary Australia Poland New Zealand Romania Africa: Russia South AfricaSlovakia Rest of Africa Ukraine Middle East Others Central Asia


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1.2 End-Use Markets

The Report quantifies regional demand for corrugated in each of the following markets, with forecasts of the anticipated shift in business from developed to developing regions: – Processed foods – Drinks – Non-food consumables – Fresh foods/produce – Domestic appliances and electrical goods – Durable goods and clothing – Industrial and machinery – Other sectors The sub markets contained in each main market are the same as last year and are listed overleaf. They apply specifically to the corrugated industry and whilst they do not relate specifically to NAICS classifications adopted in the US, we have included the NAICS codes that most closely match these categories.

Market Sub Markets NAICS Codes Processed Foods Biscuits, confectionery & snacks 3112, 3113, 3118 Dry foods & beverages 3119 Canned & bottled foods 3114 Frozen & chilled foods 3117 Dairy products 3115 Drinks Beer & soft drinks 3121 Wines & spirits 3121 Liquid milk & fruit juices 3121, 3115 Non Food Consumables Health & beauty products 325 Household products 325, 326 Pet foods 3111 Other non-foods 3122, 3222 Fresh Foods / Produce Fruit & vegetables 111 Meat, poultry & fish 112, 114, 3116, 3117 Domestic Appliances & Electrical Goods

Brown goods

335

White goods 335 Small domestic appliances 335 Consumer IT & telecom products 334 Durable Goods & Clothing Ceramics & glassware 327 Clothing, textiles & footwear 313, 314, 315, 316 DIY, motor & garden products 326, 329 Toys, games & sports goods 326, 329 Wooden goods & furniture 321, 337 Industrial & Machinery Automotive 336 Chemicals 324, 325, 326 Other industrial 3221, 323, 326, 327, 331,

332, 333, 335, 336, 339 Other Sectors


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1.3 Base Year, Estimates and Forecasts

The base year is 2011 with forecasts for 2012 to 2016. Historical data is provided for 2006 to 2010. Estimates and forecasts are expressed in terms of million square metres (Msm), billion square feet and thousand tonnes (KT), taking due account of changes in average substance weights. All estimates are based on area and weight off the corrugator. 1.4 Definitions

Statistics published by the ICCA that are sourced from National Associations, are often slightly lower than PRISM estimates, notably in Europe. The main reason for this is that, with the exception of the USA, PRISM estimates include litho laminated containers manufactured by cartonmakers and other converters not affiliated to corrugated National Associations. In Europe some of these companies report to ECMA but some are not captured by either the corrugated or folding carton Associations.


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1.5 Glossary of Abbreviations

An alphabetical list of abbreviations used in the report is provided below:

ACCCSA Corrugated Association for Caribbean Central & South America

ADB Asian Development Bank

ABPO Brazilian Corrugated Association

AICC Association of Independent Corrugated Convertors

ASEAN Association of South East Asian Nations

Bsf Billion square feet

Bsm Billion square metres

CPA Chinese Paper Association

CPF Chinese Packaging Federation

FEFCO The European Federation of Corrugated Board Manufacturers

FICCI Federation of Indian Chambers of Commerce and Industry

FMCG Fast Moving Consumer Goods

GDP Gross Domestic Product

Gm2 Grams per square metre

IMF International Monetary Fund

IP Industrial Production

JCCA Japan Corrugated Case Association

KCCA Korean Corrugated Case Association

KT Thousand Tonnes

MENA Middle East and North Africa

METI Japanese Ministry of Economy, Trade and Industry

Mn Million

Msm Million square metres

PRISM Packaging Research Intelligence Strategies and Marketing

RPC Returnable Plastic Crates

RRP Retail Ready Packaging

RSC Regular Slotted Case

Sqm Square metres

SRP Shelf Ready Packaging

TPCIA Chinese Taipei Corrugated Case Association

VPPM Vietnam Pulp and Paper Association

WEO World Economic Outlook


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2.0 RESEARCH METHOD

The starting point for the research was the PRISM Global Corrugated Database built up from research carried out by PRISM, and the 2011 statistics published by the ICCA. In total we carried out 62 high level interviews at senior executive level with major mills, converters, trade associations and other industry experts in each region of the World, using similar sources of information to those used last year’s edition. A summary of the interviews carried out is provided below:

Region Number of Interviews

North America 13

Europe 17

Asia Pacific 20

Central and South America 8

Other 4

TOTAL 62

From our investigations, we have found that some of the ICCA statistics sometimes differ from those published by the local association, or differ from estimates obtained from important locally based producers. We have therefore altered the ICCA figures where appropriate. The principles adopted concerning which source to take were as follows: Where PRISM has undertaken original fieldwork in the relevant countries, these estimates have been taken as the most reliable available. Otherwise, we have relied on the local corrugated associations, as well as

fieldwork with leading mills and producers supplying that country. The Economic Intelligence Unit (EIU) was commissioned to provide forecasts of industrial production for all of the countries under review. Forecasts of GDP were obtained from the IMF and the Asian Development Bank.


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Economic commentary is based on the following information sources:

IMF – World Economic Outlook The Economist Wall Street Journal The Federal Reserve Bank Production Statistics and Beige Books and the US

Department of Agriculture (for the USA) US Bureau of Labour Statistics (for the USA) Eurostat (for European countries) Bank of Japan and Japanese Ministry of Economy Trade and Industry (for

Japan) Asia Development Bank Development Outlook (for Asian countries) The Federation of Indian Chambers of Commerce and Industry (for India) Internet research for key countries adding items of specific interest, notably in

respect of the current political and economic state of the country under review.

Documents

Global Corrugated Forecast 2012-2016