The impact of the merger of Murphy Kappa and Veselok on the corrugated box industry pattern in Latin America
The hottest topic in the packaging market recently has been the large merger of Smurphy Kappa and Veselok, which could create one of the world's largest packaging companies. In Latin America, Smurphy Kappa operates corrugated boxes in Brazil, Mexico, Argentina and Colombia, while Veselok operates in Brazil and Mexico. How will this potentially large merger change the region's packaging share of capacity?https://www.risedongsheng.com/
Smurphy Viselok to become the largest packaging company in Latin America
The large merger between the two global packaging producers will eventually create the largest packaging producer company in Latin America, with an estimated 19.9% capacity share in the region, surpassing Brazilian producer Klabin's 18.3% capacity share. This is based on the latest adjusted capacity estimates for the Latin American pulp and pulp industry by Fastmarkets, and also takes into account all grades of packaging paper assessed by Fastmarkets, including corrugated, containerboard, and other types of industrial packaging paper.
Before the merger, Viselok was the second largest packaging producer in the region, with about 11.5% of packaging capacity in Latin America, followed by Smurphy Kappa with about 8.4%. Other producers, including multinational groups, accounted for 61.8% of the region's capacity share, meaning that while large mergers have changed Latin America's capacity share, more than half of the market's capacity is still in its infancy.https://www.risedongsheng.com/
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The two companies will vertically integrate and complement each other in markets where one of the parties has previously had little or no business. Global Value Chain (GVC) theory predicts that internalization by replicating and integrating operations is the most efficient organizational structure for such multinational corporations. The risks of this prospect are related to the fact that local antitrust authorities in all countries where the two companies have assets have not yet approved the transaction.
Corrugated packaging production will be concentrated in Brazil and Mexico
The integration of Smurficapa and Veselok also aims to explore the benefits of scale across the production chain, from pulp production (not necessarily in Latin America) to the possibility of using competitive pulp for internal trade in its own operations. In other words, it also hopes to better expand the benefits of scale in the upstream sector, and the deal also aims to explore the larger consumer market and the integrated structure of corrugated packaging plants in the downstream sector.
One of the goals of every multinational company is to optimize the form of organization in order to maximize profits, which is a fundamental principle of GVC theory. To this end, one of the economic conundrums that companies need to solve is where and how production should be distributed. The allocation of productive assets in Latin America embodies two GVC principles - factor advantage and distance from downstream links. This means that producers will try to allocate production links where local factor advantages can be exploited, i.e. there is a large amount of wood available to produce competitive pulp and paper products, or they will try to arrange production closer to the final consumer market, which means closer to the processors and end users who buy the packaging.
If it is not possible to take advantage of local factors, companies will try to allocate production as much as possible to where this strategy can be used, thereby reducing transportation and transaction costs. Not surprisingly, Brazil and Mexico lead the allocation of packaging paper capacity in Latin America, which, according to the latest estimates, will total around 19.1 million tons by 2022.
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Brazil's packaging capacity accounts for 45.8% of Latin America's total packaging capacity, which has a lot to do with two factors - wood availability and favorable weather for the production of pulp and paper products. Many producers, including leading packaging producer Klabin, are exploring these advantages and are able to export their products overseas at very competitive prices. In addition, Brazil is one of the largest packaging markets in Latin America, and distributing production there means it will be closer to corrugated box mills and consumer markets.
Mexico is the second largest packaging producer in the region, accounting for about 28.9% of total packaging capacity, reflecting one of the principles of global value chains - the country's proximity to important consumer markets. About 80% of Mexico's consumer goods are exported to the United States, and this trade flow benefits from the geographical proximity of the two countries. Mexico cannot grow trees or produce as much base paper as Brazil due to unsuitable weather and soil conditions, but it can easily import pulp and paper from the United States and specialize in packaging to transport consumer products.https://www.risedongsheng.com/
Other countries have a smaller share of packaging capacity in the region, followed by Chile, Argentina and Colombia. In these countries, there is some base paper production, just like there is some pulp production, although it cannot be compared to Brazil's production. These countries are also the second largest packaging market in the region, mainly due to fruit exports and some domestic correlations.
Impact on the paper packaging market in various countries
The following summarizes the impact of the merger of Smurficapa and Viselok on the paper packaging market in four Latin American countries: Brazil: The merger will mainly affect the containerboard paper market, as the two companies do not produce other paper products; Mexico: The merger will affect the entire packaging market in Mexico, as the two companies produce a variety of wrapping papers in the country; Argentina: The merger will not initially affect the Argentine market, but may change in the future; Colombia: Prior to the merger, the Colombian packaging market was already led by Smurficapa.