Smurfit Stone, the American packaging group 33 per cent-owned by Jefferson Smurfit Group, has increased the price it charges customers for its key linerboard product by $50 per ton - a move that has resulted in a sharp rise in Smurfit Stone shares on the Nasdaq market.
So far, none of Smurfit Stone's competitors has followed its lead. Industry sources believe that the other major linerboard producers will need to increase prices if the lead taken by Smurfit Stone is to stick.
Even if others do follow the Smurfit Stone lead, market sources believe that the prospects of imposing the price increase on February 1st are low and that it may be March or April before linerboard inventories industry-wide are low enough to allow the price increase to stick. The $50-per-ton price rise announced by Smurfit Stone will bring its linerboard price to $370 per ton if it holds.
Smurfit Stone shares rose almost $2 in the Christmas-New Year period to $14.19, partly in response to being included in JP Morgan's "Best of sector for 1999" list.
However, since the December 31st announcement of the price increase, the shares have risen sharply to over $16 as investors took the view that the increase, even if it does not hold in February, is a signal that linerboard prices are back on a cyclical upswing. At over $16, Smurfit Stone shares are at their highest level since last July.
NCB analyst Mr John Conroy was cautious about the prospect of Smurfit Stone's price increase holding in February, but said that the move to raise prices is a positive one and reflects Smurfit Stone's determination to take a lead position in product pricing as well in the rationalisation that the merger between Jefferson Smurfit Corporation and Stone will bring.
"If you look at the trend of inventories since last October, it will probably be March or April before capacity reductions and downtime reach a level to support a $50-perton increase."
However, Mr Conroy added that the pricing move has been received well and that the US packaging sector is up 2.5 per cent with highly leveraged players like Smurfit Stone benefiting more than most. So far, the linerboard price increase has not had any major impact on the Jefferson Smurfit share price in Dublin, where the perceived financial risk of the Smurfit Stone merger has weighed down on the shares.
Last month, Smurfit Stone revealed plans to eliminate 17 per cent of its containerboard capacity, with projected annual savings of $350 million. That move to cut capacity was the first element of the merged company's strategy to resposition itself and has now been followed by the move to increase prices.
The next major part of the restructuring will come when Smurfit Stone sells off surplus assets such as its newsprint operations and its timberlands. The firmer product prices become, the easier it will be to get an acceptable price for these assets, say analysts. Smurfit Stone has set itself a target of $2 billion in asset sales, aimed at reducing its huge debt burden of $6.8 billion.
Meanwhile, Smurfit Stone's 33 per cent-owned Venezuelan associate, Verepal, has negotiated a grace period on debt payments as part of efforts to confront severe cash problems, according to local reports. Verepal, Venezuela's largest paper company, has reached a deal with creditor banks to postpone $92 million-worth of interest and capital repayments until the end of March.
Verepal reported a $10.7 million loss for the first nine months of 1998, compared to a $9.7 million profit in the first nine months of 1997. It said at the time of the third-quarter results that a sharp local recession had driven domestic sales to a five-year low. To reduce costs, Verepal said it had to cut its workforce by 24 per cent.
