Restructuring of JSC main market focus

Finding a partner for its US associate Jefferson Smurfit Corporation, a possible acquisition in Brazil and some sharp cost-cutting in Britain are in prospect for the Jefferson Smurfit Group in coming months.

In the cyclical paper and packaging industry, now considered to be at, or close to, the trough of its latest cycle, there is some confidence that product prices will increase this year. Smurfit expects a linerboard price increase notified in the US for April to be implemented in May or June.

Demand remains strong in most markets and while inventories, or stocks, are higher than normal they should fall as production downtime is taken between April and June. Strong demand and control of production capacity are essential pre-requisites for sustained price increases. Because of the high fixed production costs in this sector, price increases immediately translate into profits. One of the uncertainties on the horizon is how the collapse in Asia will impact on global growth and therefore on demand. Taking a positive view, Smurfit feels that local manufactures may limit capacity expansion plans and that cheaper products from Asian producers offer no direct threat to Smurfit. Overall the group expects Asia to continue to be a net importer of paper and container board.

One problem area for Smurfit is the UK where strong sterling is making imports cheaper than locally produced paper and packaging. Smurfit is implementing cost-cutting measures to reduce its cost base. Measures include closing its Hatfield plant, abandoning an expensive divisional structure and closing its head office in Windsor. The sale of some non-core business is likely. The Irish market was buoyant but competitive in 1997. But Smurfit profits suffered from the strength of sterling which pushed up raw material prices - in competitive markets it proved difficult to recover this increase from customers. This is expected to remain a problem.

Perhaps the greatest market focus is on the restructuring of JSC in the US. This will involve the sale of non-core assets and a new business partner for JSC. The sale of the plastics division was the first step in this process, but sales will only proceed when the group has identified better uses for the capital involved. There has been some criticism in the market that the group could lose out in the latest restructuring round unless it moves soon. But after much evaluation, Smurfit is likely to make a move before long.