August 30, 2024
In our previous column titled “Alternative Price Mechanism,” we discussed how “Big Paper”—the group led by International Paper, Packaging Corp. of America, and Smurfit WestRock—is looking for new ways to think about pricing. The current method, tying box prices to the open market price of containerboard, hasn’t helped those producers stay as profitable as they’d like.
A more data-driven approach offers advantages. New extended producer responsibility (EPR) legislation also could play a part in accelerating a
change in pricing paradigms.
EPR Overview
EPR laws may shape markets for recovered commodities by setting prices and controlling which companies can process and use the materials. California, Oregon, Colorado, and Maine were the first states to pass EPR laws, and Minnesota, New York, and Tennessee are close behind. Another 12 to 14 states have initiated legislation.
Under EPR, brands such as Pepsi, Conagra, General Mills, and Clorox pay into a producer responsibility organization (PRO). It distributes those funds to help cover the costs of recycling, equipment upgrades, training, education, marketing, and labor. The PRO also becomes the main driver of recycling policy in the state. The current PRO in the U.S., the Circular Action Alliance (CAA), and its members represent over 900 brands.
EPR laws place the cost of recycling onto the brands that generate the products. Brands are essentially “taxed” based on the material in their packaging and how much is used. Commodities are listed by type and accompanied by a fee schedule. Brands must report how much of a product was sold into a state and pay accordingly.
Self-reporting will be key to the program’s effectiveness. Brands will need to collect data from packaging suppliers that identify the packaging’s material, percentage of recycled content, and weight. Smaller companies with up to $10 million of revenue, which use little packaging, may pay flat fees ($600 on the low end in Oregon, for example) to help cover recycling costs in their states.
Packaging commodities that aren’t easily recycled or lack vibrant aftermarkets have higher fees per unit of weight than those with high recycling rates and aftermarket demand. In some cases, a commodity may be exempt from fees after a threshold recycling rate is reached. This is called eco-modulation, and details are still being discussed by CAA and states.
Performance-Based Pricing
If major brands are incentivized to adopt lighter-weight packaging, demand may rise for producers able to make lightweight containerboard. As more brands adapt to the new fee structure, choosing paper combinations that perform to specifications at the lowest possible weight may become the preferred option.
Amazon has succeeded in lowering many boxes to 26 edge crush test (ECT), but many (if not most) mills lack the capability to run light-basis-weight paper. New-Indy’s Catawba mill and ND Paper’s Biron boast new machines that can produce paper down to 18# or less.
This shift and the potential for higher old corrugated container prices might pivot the industry toward pricing based on performance rather than material type and weight. For over 40 years, 42# kraft linerboard has been the benchmark for box sales. By contrast, Green Markets has chosen to track prices for the lighter kraft weights used by boxmakers to form 32ECT boxes.
Performance-based pricing could be based on dollar per short span compression test or dollar per box compression test. Either way, the classic approach to pricing—virgin versus recycled board—may change.
That could free mills and box producers from their heavy reliance on the industry’s benchmark index. Tying box pricing to linerboard has frustrated mills that want to increase prices to cover rising costs.
Lightweighting and performance-based pricing would put more power in a producer’s hands to make the best box possible at a competitive price. Now that EPR fees are poised to become a consideration, the “value over volume” pricing strategy may find a footing.
Ryan Fox is a corrugated market analyst at Green Markets, a Bloomberg company.
