April 6, 2016
In the November/December 2011 issue of BoxScore, we introduced you to the following economic factors regarding containerboard pricing:
- Yield advantages with emerging ultralightweight containerboards;
- Supply-and-demand economics;
- Variations in quality within grades in North America, and the European quality grade structure and pricing differences;
- Actual versus published prices; and
- A typical profit curve for a paper machine based on grades.
Last fall at some regional AICC meetings, we delivered a presentation on the apparent calmness of linerboard and medium prices over the last several years. With RISI’s reminder in the December 18, 2015, issue of Pulp & Paper Week that in January they would “rationalize” their transaction, list, and open-market pricing, they have announced a formula for publishing prices. This has been three years in transition.
About 10 percent of U.S. containerboard is exported at mill nets significantly below domestic returns, per reports from security analysts. Mill nets are different for Mexico than for northern Europe, which are different than the Mediterranean. This swing tonnage helps to stabilize domestic supply with demand.
Supplier consolidation had a significant impact, as 70 percent of board manufacturing is held within four companies. This is a major strengthening of the supply side of the equation. Twenty years ago, the top five producers had only about a 40 percent market share. Recently, more than 2.2 million tons of high-cost capacity has been withdrawn and about 1.5 million tons added in new construction or conversion of existing newsprint and white paper machines to the lighter side of containerboard weights. Lighter containerboard, same boxes, higher yields.
Our economy has not been robust since 2008, so the demand for corrugated has been lackluster. Yet we have seen stable containerboard pricing. While we might think that with a rising population the need for increased packaging would naturally follow, this has not been the case. Inventory levels in tons and weeks of supply are key to stable pricing and one of the key elements that stimulate the security analysts to speculate on possible price movements. Analysts also look to the movement of the Federal Reserve and the prime rate, which until November 2015 also had not moved since 2008. Economists look to housing starts, The Conference Board’s consumer index, University of Michigan consumer sentiment, the National Association of Manufacturers’ production index, movements in U6 employment, and the Institute for Supply Management’s index.
Mill operating rates are probably the most-watched measure of the supply and demand change month after month. We wait for comments from the financial institutions after the American Forest & Paper Association publishes production statistics and the Fibre Box Association publishes the estimated corrugated shipments. With operating rates above 95 percent, supply and demand are considered in balance, and when rates fall below this, financial managers see signs of weakness unless temporary mill downtime has been announced.
The price movement of old corrugated containers also has an impact on the stability of board pricing. When China is not buying and ocean freights are fluctuating, the cost of recovered fiber moves, and input costs at the mills change. Since secondary fiber represents more than 46 percent of all containerboard source materials, these irregularities can impact mill costs, selling prices, and profit margins.
Several reports from security analysts say that producers’ earnings have come close to 20 percent, which are historical highs for the paper industry. These earnings have gone into major projects to rebuild energy systems and meet newer emissions regulations, but not to increase capacity so as to drive prices down.
In January, the media started reporting price erosion beyond medium and recycled grades. Security analysts see slower market growth for corrugated and are predicting a continuation of the trend that has started. Stay tuned.
Ralph Young is the principal of Alternative Paper Solutions and AICC’s technical adviser. Contact Ralph directly about technical that impact our industry at askralph@aiccbox.org.
