The recent earnings calls of publicly traded box companies revealed an insight that might be of interest to AICC members: Some of North America’s biggest producers have reservations about the standard way price changes are implemented for containerboard and, therefore, boxes.
Problem
Consolidation in the corrugated packaging industry has left five producers with control of about 75% of containerboard production. Many smaller independents that make up the other 25% belong to AICC, and they must compete for market share with “Big Paper,” the group led by International Paper, Packaging Corp. of America, and WestRock.
Since most of the containerboard produced by companies with paper mills are vertically integrated, the open market has been left to determine when the market price, or index, changes. However, the open market is now a small slice of the industry, representing only about 5% of all consumption—the epitome of the tail wagging the dog.
This creates a problem because box prices have long been tied to containerboard prices. Contracts for boxes often stipulate that their prices won’t move until containerboard does.
But what happens when business dynamics change and a company wants—or needs—to raise box prices, yet containerboard hasn’t budged? If your contract follows historical norms, you’re out of luck. The only way to raise box prices is to raise the price of containerboard.
Still, most contracts are worded in such a way that they’re tied to “open market transactions,” as reported by a single publication. Typically, if demand ebbs and supply goes up, prices fall. Things get more complicated when the cost of making something rises and demand stalls. Recently, demand has been weak, paper supply has grown, and box prices have fallen. Producers need to cover rising costs, but their hands have been tied by the open market.
But Wait, There’s More
So, why did box prices decline in the first place? It wasn’t simply because of a drop in containerboard’s open-market price or global oversupply. Rather, it stemmed largely from greater competition for market share amid waning box demand, compounded by a changing cost curve as companies invested in high-speed equipment and automation. They’ve had to spend to keep up with the competition, address changing workforce conditions, and meet the needs of box buyers.
Potential Solution
A few years ago, Green Markets developed an algorithm to try to understand why and when containerboard prices may move. In a backtest to 2015, the algorithm picked up every box-price change in the period. In August, the algorithm signaled that a $50 price hike would align with historical levels.
Several weeks later, the industry’s benchmark publication reported that prices for containerboard went down by $20 a ton. Ten days after that report, Packaging Corp. of America issued a $70 per ton increase effective January 1. Perhaps unsurprisingly, $50 plus $20 equals $70.
Green Markets noted in its April 25, 2024, market report that the algorithm indicated that another $30–$40 per ton increase would still fit historical norms. The next day, International Paper announced a $50 per ton hike effective June 1, 2024.
The outlook for containerboard prices is uncertain. However, we believe the future of market pricing may be driven by algorithms that account for input costs and other factors, rather than a survey of a very small group of open-market buyers.
Upside
For independents, this would make the open market essentially irrelevant to contracts, opening the floodgates
to more flexible prices. Since open-market transactions would no longer trigger price moves, negotiations between containerboard buyers and mills could become more amicable. A mill seeking to offer a discount to pick up a new customer could do so without fear that the report of the lower price would affect box prices.
For integrated producers and box buyers, such a method would provide a potential calculator for testing pricing scenarios based on varying assumptions about the algorithm’s inputs.
The industry’s approach to pricing appears to us to be in transition, and we’ve only scratched the surface.
Next time, we’ll talk about how extended producer responsibility laws may help accelerate the change.
Ryan Fox is a corrugated market analyst at Green Markets, a Bloomberg company.
