A better balance between demand and supply in paper and packaging markets, particularly in the US, should help the Jefferson Smurfit Group in the current half and into next year. In the notoriously cyclical sector, there are signs that product prices are on the rise again. But in some areas prices are not yet robust. A $50 per tonne increase in linerboard prices announced in the US in August has stuck and another $50 increase is planned for October. Newsprint and medium-grade paper prices have risen. But it will be some weeks before it is clear whether the 12 per cent box price rise announced in August will hold.

There are some encouraging US industry statistics: containerboard exports are up 34 per cent and industry stocks are down to 4.4 weeks supply. But the danger is that some US producers could break ranks and increase supply or sell below cost, factors which have acted before to depress prices in the sector.

While there are no indications at the moment of increases in capacity, Dr Smurfit has warned that the industry must minimise the problem of oversupply.

"Product pricing has been the singular cause of the decline in profitability. Weak pricing is, simply, a function of the industry building excess capacity leading to oversupply. As we face into a more favourable pricing environment, the factors that cause the oversupply problem must be eliminated," he said.

Concerns about capacity increases will influence group strategy on its 46.5 per cent US associate Jefferson Smurfit Corporation. The root-and-branch review of JS Corp should be completed in October. Some non-core interests including the newsprint division and forests may be sold off. But the reinvestment of the funds generated will be the key to future growth in the US. JS Corp may move to consolidate businesses so as not to increase industry capacity.

While the pricing environment is better in the US, in Europe corrugated box prices have not yet improved. Paper prices have picked up in France and Germany, but markets remain difficult in Italy, Spain and Britain. On the costs side, the group plans to cut operating costs by £35 million this year. Tight capital expenditure controls are in place.

The group will continue to make acquisitions. Two have been made since the end of the half-year, in Germany and Argentina.

With core product prices starting to turn in the US and some improvements in other markets, as well as the focus of cost control, group results should start to reflect the improvement in its operating environment.