Smurfit WestRock merger set to propel global paper packaging circularity, says Rabobank analyst

19 Sep 2023 --- Paper and corrugated packaging giants Smurfit Kappa and WestRock have agreed to merge in a move that market analysts expect will advance circularity-recyclability and decarbonization standards across America.

According to Rabobank, the US and Latin America stand to benefit from Smurfit Kappa’s experience within the EU, where environmental sustainability regulation is considerably more stringent and the “new energy reality” has triggered demands for greater operational efficiencies.

The Smurfit WestRock US$34 billion tie-up is also expected to inspire product innovation through combined expertise, with this sustainability leadership promising to bolster the paper packaging sector in its substitution competition with other packaging materials – especially plastics.

Both Smurfit Kappa and WestRock have approved net-zero targets under the Science Based Targets initiative.

European experience transfer
Europe-based Smurfit Kappa has significantly more experience with recycled-based packaging than its new US ally. Europe boasts a relatively well-established paper recycling system, stemming from decades of development to counter resource scarcity and accommodate high-density populations in cities, where circular waste systems are most valuable.

“In North America, the share of virgin-based materials is much higher. Europe uses around 80% recycled paper, and the US uses more like 30%. But with Smurfit Kappa’s knowledge from Europe, we can see an acceleration in the adoption of recycled-based grades in other regions,” Natasha Valeeva, senior analyst for Packaging & Logistics at RaboResearch, tells Packaging Insights.Smurfit WestRock is expected to advance product innovation and reinforce the paper packaging industry’s challenge to plastics.

“Also, Europe is much more lightweight-experienced than the US, meaning it uses less packaging in general.”

The merger is also expected to boost Latin America’s circular economy, where Smurfit Kappa already has a strong presence in Argentina and Colombia. Latin America’s paper packaging market is relatively immature but witnessing fast-growing demand.

“The combination would become a one-stop shop for paper packaging, offering both containerboard and boxboard and in virgin and recycled fiber – something the continent has not seen so far,” says Valeeva.

Smurfit Kappa also entered the North African market this year with a solar-powered corrugated packaging plant in Morocco.

New energy reality
Meanwhile, access to virgin fiber and packaging paper grades has become more important for the growth of European paper packaging players like Smurfit Kappa amid surging energy costs. 

“European players’ competitiveness has been weakened because of its ‘new energy reality,’ while decarbonization pressure is more intense than in other regions. These pressures are encouraging companies to look for growth opportunities internationally, especially after post-pandemic sales declines following easing retail sales, high inventories and the rebalancing of e-commerce demand,” says Valeeva.Post-pandemic decline in e-commerce demand is stimulating packaging leaders to pursue merger and acquisition opportunities.

Rabobank points out that the profitability of certain European mills might also be hampered by the global sales downturn.

“We recently saw some acquisitions by European players in their hunt for virgin growth opportunities in other regions – such as Billerud and Mondi in the US and Klingele Paper & Packaging Group in Brazil,” continues Valeeva.

“With merger and acquisition activity, larger, more resilient companies can grow quicker.”

The Smurfit WestRock combination will secure Smurfit Kappa access to lower-cost virgin fiber and containerboard at a time when the competitiveness of European containerboard production has weakened, potentially stimulating exports of more competitive virgin containerboard to Europe.

According to Arco Berkenbosch, Smurfit Kappa’s chief innovation officer, e-commerce will remain integral to the growth of Smurfit WestRock and the wider packaging industry.

We also explored how the Smurfit WestRock deal could harm the UK economy.

By Joshua Poole