Domestic packaging production in Brazil, including wrapping paper, appears to be resilient to weak domestic consumption, due to external factors and structural changes in consumer behavior. Strong growth in paper packaging and food production and exports in Brazil, driven by currency depreciation from January to May, supported packaging and wrapping paper production. Despite a recent decline in consumer-side drivers, increased demand from the food delivery sector has been driving production of wrapping paper and paper bags since the beginning of the year.
Production remains strong despite weak domestic sales
According to data from the local packaging paper association, from January to May, Brazil's total shipments of corrugated boxes, packaging paper and supporting materials increased by 8%, higher than the forecast of about 5% released in January and much higher than the market's general expectation of a modest recovery of 1%-2%.
According to the Brazilian Tree Association, overall paper packaging and wrapping paper production data show a similar trend, with year-on-year growth of 9.9% and 4.9% in January-April compared to the same period in 2023, while domestic sales of these two grades fell by 0.4% and 2.5%, respectively. When analyzing industry inventory levels and weak demand for durable and non-durable goods, the disconnect between production and domestic sales data is even more severe. Overall inventories are high, close to the levels of the first and fourth quarters of 2023, while durable goods demand is reported to be weak, which has limited their packaging purchases.
If packaging paper and paper packaging production remains strong despite falling domestic sales and high industry inventories, what is supporting production? The obvious answer is export markets.
Packaging and food exports support high production of packaging paper
The export market has always been one of the main drivers of production in Brazil, affecting production through two channels: direct exports (paper packaging and wrapping paper) and indirect exports (packaged goods, mainly food). In both cases, the change in the exchange rate (which increased by 4.8% from January to May compared to December last year) increases international shipments by improving the profitability of these transactions.
Direct paper and packaging exports have been growing at double-digit rates, according to estimates based on trade data. From January to May, linerboard exports totaled 176,000 tonnes, up 15.3%, while linerboard shipments nearly doubled during the same period. Containerboard and other industrial packaging paper exports rose 5.9% to nearly 43,000 tonnes during the same period.
Despite the differences in the grades analyzed, similar conclusions can be drawn by looking at data from the Brazilian Tree Association. Overall paper packaging exports increased 19.5% to 318,000 tons from January to April, while packaging paper exports increased nearly 70% to 39,000 tons in the same period. Indirect exports also improved in 2024, enough to continue to support production and offset further declines in domestic sales.
Brazil's food production rose 6.3% between January and April, according to the National Statistics Institute, helped by strong food exports, which surged 47.7% compared with the same period in 2023, and 38.4% if May is included in the analysis. Exports of processed foods surged 50.8% to more than 15.6 million tons between January and May, while offshore shipments of animal protein, mainly beef and poultry, rose 8% to 3.6 million tons in the same period.
Industrial food exports typically use two types of paper packaging: primary packaging, usually containerboard or paperboard, used to protect the product in retail stores; and secondary packaging, usually made of containerboard, used to securely bundle and protect multiple small units during long-distance transportation in international trade.
Despite the good performance of export markets, domestic sales were only partially supported by changes in consumer behavior after the pandemic due to a more stable macroeconomic environment, which was not enough to prevent a sharp decline in total domestic sales figures, which was mainly caused by a decline in overall demand for consumer goods.
Food delivery recovery partially supports packaging paper demand
Due to social isolation caused by the pandemic, food delivery demand increased significantly between 2020 and 2021. However, as the economy reopened and inflation soared, consumer purchasing power was severely weakened, causing food delivery demand to fall sharply between 2021 and 2023. Data for 2024 showed a recovery in food delivery demand due to a more stable macroeconomic environment.
The recovery of income levels for some of the population since 2022 and the control of inflation from 2023 to 2024 have restored consumer purchasing power and allowed households to re-adopt the food delivery habits of the pandemic. According to the Brazilian Institute of Geography and Statistics, average incomes increased by 4.7% between January and May 2024 compared to the same period in 2023 and by 12.2% compared to 2022, making room for discretionary spending, such as ordering food online.
To boost sales, most food stores offer online ordering for delivery and/or takeaway. According to the Annual Food Service Industry Study 2024, online orders account for about a third of their revenue. The return to office work for many middle-income families, reduced budgets, as well as the convenience of ordering and a wide range of options have driven online food ordering in Brazil.
Despite strong overall inflation, consumption of processed foods has suffered from the inflationary contraction trend over the past two years, and sales continue to climb. In the January-April period of this year, supermarket retail sales increased by 5.6%, according to the Brazilian Institute of Geography and Statistics.
If the food sector is doing so well, then why are overall packaged sales still so weak? The recent deterioration in consumption drivers and comparisons to other non-core sectors such as durable goods offer the answer.
Deterioration in consumption drivers constrains durable goods demand
The durable goods sector, which accounts for approximately 20%-25% of Brazil’s packaging demand, has been struggling with deteriorating consumer conditions since the beginning of 2024, despite an overall improvement in the macroeconomic situation compared to 2022 and 2023.
Surprisingly, even as disposable incomes have risen and unemployment has fallen, debt levels have been rising steadily since January. Data from the local Confederation of Commerce shows that about 78.6% of Brazilian households are in debt to some extent, and more than 28% have failed to repay their debts. According to the Central Bank of Brazil, the national debt-to-income ratio is now close to 45%, just slightly lower than the 50% in 2022 and 2023. The debt situation has barely improved, which is worrying for policymakers, especially if macroeconomic conditions are much better than in 2022 and 2023.
In fact, debt levels declined in the second half of 2023 due to the economic recovery and several debt renegotiation plans issued by public and private entities such as Desenrola, but the impact of these plans is expected to last longer. The increase in household debt limits domestic consumption now and in the future, especially for durable goods. Since the beginning of 2024, consumers have been reporting that they are postponing the purchase of durable goods and believe that the current situation is similar to that in 2023, despite their higher income levels.
Surprisingly, according to the data, credit access has also become easier due to lower interest rates and consumers being removed from blacklists issued by credit institutions, but these conditions are not enough to support demand for durable goods, thus limiting packaging demand in the sector. According to IBGE data, furniture and appliance retail sales grew by only 1.7% between January and April, which was lower than market expectations and not enough to support packaging demand like the food industry.
While the food delivery sector has been growing and supporting packaging demand, e-commerce has performed differently. Public companies reported in quarterly earnings calls that online sales performed below market expectations, which expected a faster recovery in 2023 than now due to an improvement in the overall economy.
Not coincidentally, the highway freight sales index (which includes food delivery orders) rose 1.9% from January to April this year, according to IBGE, while sales of goods warehousing and auxiliary transportation services related to e-commerce fell 1.5% over the same period. In other words, more perishable goods are being transported across the country, while transportation and warehousing of durable goods have declined. Other consumer habits, both old and new, are affecting household consumption and suppressing durable goods purchases.
New Habits: Experiences and Gambling Steal Budget Share from Durables
Consumers are choosing to spend the majority of their incremental income on experiences. As the economy reopens, consumers are spending more on services related to out-of-home experiences.
IBGE data showed that in the January-April period, consumer spending on hotels and accommodation increased by 11.7% compared with the same period in 2023, while spending on dining out services increased by 10.1%, highlighting the new consumption focus.
However, a new trend – the unplanned and unregulated online gambling market – is consuming a large portion of household resources. Since the pandemic began, this market has been boosted by increased digital inclusion (which has also supported the food delivery industry, for example), and accounts for a large part of household budgets.
Brazilians are expected to spend more than $10 billion on online gambling in 2023, equivalent to 2.3% of the entire retail market and more than the total export revenue of animal protein last year. It is worth noting that the online gambling figures may be revised upwards due to the lack of data and transparency in this market.
According to recent research by media group Folha and data from IBGE, the average Brazilian spends about 10% of his or her monthly budget on online gambling, a huge share considering the average debt-to-income ratio is 45%. The data shows that the poorer the consumer, the greater the share of his or her income spent on online gambling.
The problems associated with this unregulated market have affected hundreds of families who have reported skyrocketing debt levels in the hope of recovering some of the money lost in order to feed their gambling addiction. This is particularly true for internationally hosted sites which are not regulated by local authorities and in many cases are under investigation for fraud.
Summary: Despite stagnant consumption, production should grow in 2024
Despite weak domestic sales and stagnant domestic demand, Brazil's packaging market should report positive figures in 2024. According to the Latin American Pulp and Paper Forecast, overall containerboard production is expected to grow to 5.4 million tons in 2024, 3% higher than in 2023. Exports will increase by nearly 20% this year to more than 500,000 tons, while overall apparent consumption will increase by 2% to nearly 5 million tons. For the total shipments of corrugated boxes, packaging paper and supporting materials assessed by Empapel, annual growth of 6.1% is expected to reach 4.2 million tons in 2024.
The export market, driven by direct and indirect exports, should be the main driver of production growth and should also support domestic sales this year, thanks to the currency depreciation expected to continue until the end of the year. The improvement in the Brazilian macroeconomic environment and demand drivers has not translated into an increase in the consumption of goods, but rather into a growth in experiences and food delivery. The restoration of food delivery habits, developed during the pandemic but suspended between 2022 and 2023 due to inflation and reduced purchasing power, has brought hope to the packaging industry, supporting sales and production. However, economic risks related to household debt in Brazil have been increasing, which poses a challenge to the improvement of domestic goods sales as well as packaging.
