The UK’s largest producer of recycled paper and corrugated packaging saw shares surge more than 10% today after it forecast half-year profits “substantially ahead” of expectations.

DS Smith said it benefited from a faster reduction in operating costs than originally expected, as well as the slower erosion of its selling prices. It still expects profits for the six months to October 31 to be down on last year.

The rally in shares – up 12.7p to 131.5p – came despite the company warning that the second half of the financial year will be challenging.

This is because its packaging arm for consumer goods has been squeezed by a recent rise in the cost of waste paper – its core raw material – at the same time as recession has put pressure on its prices.

It has informed customers of price increases, but warned the full cost recovery will probably take longer than the current financial year.

DS Smith added: “The speed of the recovery of the costs will be a significant factor in determining the outturn for the second half.”

Smith’s office wholesaling products business, Spicers has seen significantly reduced demand, with profits for the UK business remaining low.

The firm’s St Regis paper business is based in Maidenhead. It also has a plastics arm in Rugby, recycling operations in Caerphilly, while Spicers is based in Sawston, near Cambridge.

The company employs 11,000 people and generated annual revenues of more than £2bn in its last financial year.