Future Trends in the Converting Business
By AICC Staff
September 12, 2019
AICC was founded at a time when paper was in short supply and the integrated producers were not setting aside enough tonnage to allow the independent producers to service their customers. The affected independents banded together to form AICC. It was a great time to be a converter, because the economy was still growing rapidly, so there were still plenty of new customer opportunities. The effects of Asia and other emerging manufacturing markets across the globe had yet to have a major effect on the United States. Over the next decade, North American containerboard capacity grew, the growth in demand cooled down, and other markets, most notably in Asia, began to grow exponentially. The balance between supply of containerboard and the demand for it found an equilibrium in which all converters could operate without supply .
In 1990, North America accounted for 40% of the global containerboard markets, and today this number is less than half of that—yet most of the mills that were in existence then are still in existence. Millions of additional tons of capacity have entered the market (and millions more are scheduled to come on line over the next few years), which leaves us in the current situation of excess supply. North American mills are currently exporting more than 500,000 tons of containerboard to markets, many of which are developing their own mill systems and will not need our paper in the long run. Export prices have been dropping lately, and while there are always ebbs and flows to these markets, it is unlikely that growth in domestic demand will account for all of the new mill and paper machines that will be coming on line in the next few years.
To make matters worse, lightweighting (or “rightweighting,” as AICC’s Ralph Young refers to it) is here to stay. The average basis weight of corrugated board sold in North America in 1990 was almost 140 pounds per thousand square feet. Today this number is in the mid- to high 120s and dropping every year. The mill system here is heavily invested in making 42-pound kraft paper at a time when basis weights of combined corrugated board are dropping quickly. This trend is expected to not only continue, but accelerate, which is why the bulk of the new tonnage coming on line in the near future can make very low-basis-weight paper. Europe has been a leader in ultralow-basis-weight board for years, with many of their mills making paper that is less than 20 pounds per thousand square feet. Many of the customers of the European converters also operate here and are pushing for a move to lower-weight board here. The U.S. investments by European-based companies such as DS Smith and Smurfit Kappa will likely serve to accelerate this trend toward lighter board.
In 1990, 16 integrated producers accounted for 74% of the market, and there were more than 50 companies who owned mills. Today, four integrated producers account for 76% of the market, and there are about 20 companies overall who own mills. This concentration of economic power has been successful so far in keeping prices high, which has been good for both integrated and independent producers. But in my opinion, there is a limited amount of time during which they will be able to buck the fundamental laws of supply and demand. The export markets are drying up, the new competition is going to be pushing lighter-weight paper, and the new mills coming on line will be able to make lighter-weight paper. RISI has announced two $10-per-ton decreases in the price of linerboard in the past two months. The entire notion of a free market for containerboard in North America is a stretch, anyway, since so little tonnage is bought by independent producers. In any event, unless the big integrated producers start shuttering mills, I would expect this trend of falling prices to continue.
Technological innovation continues to change the face of converting, as well. In 1990, the standard for corrugators was a width of 87 inches and an average speed of 500 lineal feet per minute. The standard today is a 110-inch machine running at 1,000 lineal feet per minute. Converting equipment that used to take a half-hour to set up and would top out at 5,000 pieces per hour now routinely sets up in two minutes and runs more than 20,000 pieces per hour. Digital printing has gone from being just a curiosity to becoming an integral part of many converting operations. Digital presses are now running at better than 200 feet per minute with a width of up to 6 feet, giving them a gross potential of 5,376,000 square feet per eight-hour shift. As the speeds increase and the quality of the print continues to improve, they will begin to give flexography a real run for its minute. Converting equipment that used to take a half-hour to set up and would top out at 5,000 pieces per hour now routinely sets up in two minutes and runs more than 20,000 pieces per hour. Digital printing has gone from being just a curiosity to becoming an integral part of many converting operations. Digital presses are now running at better than 200 feet per minute with a width of up to 6 feet, giving them a gross potential of 5,376,000 square feet per eight-hour shift. As the speeds increase and the quality of the print continues to improve, they will begin to give flexography a real run for its money. Many converters have purchased die cutters and flexos with inside and outside print, and many more have them on order. With the increase in internet sales and more and more demand for retail-ready packaging, this trend will also continue and is likely to accelerate.
The biggest issue that my clients and friends tell me about is the difficulty in attracting qualified employees at all levels. Unemployment rates are at historically low levels, and attracting and keeping quality employees is becoming problematic for most small to medium-sized businesses. In addition, the younger employees have a different work ethic and overall mentality than do we aging baby boomers; new strategies need to be developed in figuring out how to motivate younger generations. More downtime and the quality of their work environment seem to be far more important to them than overall compensation levels. They also don’t seem to like to stay in the same position for more than a couple of years.
Everyone also seems to be worried about a recession rearing its ugly head in the near future. The current economic expansion has now broken the old 120-month record for the longest continued period of growth in history. Surely, this expansion must end sometime, and when it does end, some companies will be in trouble, and people will get hurt.
So, what we have here in North America is a market that has way too much paper supply, slow growth in demand for corrugated products, expensive equipment that must be bought to stay competitive, a probable shift to lower-basis-weight boxes on the horizon, and a general difficulty in attracting and maintaining employees. One might think that this would lead to a bleak outlook for the converting business.
However, every cloud has a silver lining, doesn’t it? In this case, converters must embrace these trends and figure out how to move forward. In my opinion, this is a great time to be a converter in North America, and here’s why:
1. While the excess supply problem isn’t going away, converters must learn to adapt to a period of falling prices for containerboard. Prices have been on the rise for so long that it’s hard to remember how to manage customer relationships in an environment of falling prices. But it certainly can be done, and the independent sector must begin to formulate these plans immediately. Customer contracts must reflect this new reality, and negotiations with suppliers will need to be a little more aggressive.
2. While the cost of new capital projects is high, interest rates are still at historically low levels, and the current tax environment allows for a 100% write-off in the year that you buy the equipment. In addition, the overall high cost of equipment and industrial real property (which is also at very high levels in almost every major market) is a tremendous barrier to entering the business. The days when a salesperson could go into competition with you by buying an old piece of equipment and setting up shop in an old building are over. If someone wants to get into the converting business, they are going to have to write some very large checks.
3. While everyone seems to fear recessions, they also create opportunities. A company with a strong balance sheet entering a recession will find that there will be some good deals on property and equipment to be had. Similarly, there should be some qualified employees who will be looking for new homes. The key is to be financially strong when the recession hits. Now is the time to get all your financing in place, since rates are still low, and clean up your receivables and inventory. Take greater notice of your customers who are slow-paying, and make sure that you are not carrying any excess inventory for them. It is also the time to get a little tougher on credit, because if a recession hits, there will be more bankrupt and insolvent customers to deal with.
4. Increase your knowledge and experience in working with lower-basis-weight board. See which machines can convert it and which machines can’t, and start to develop a long-term strategy for converting this board so that when the market goes lighter and your customers start asking for it, you will be ready.
5. Embrace high-speed converting and start to develop the metrics to understand its effects on your operation. Make sure you take time into account when you are evaluating the profitability of an order.
Change seems to be the only real constant in the universe. Businesspeople who look for future trends and begin to plan for them will have a leg up on their competitors who are more reactive to changing market conditions. This is still a great time to be a converter, if you embrace the changes that are happening in your
Mitch Klingher is a partner at Klingher Nadler LLP. He can be reached at 201-731-3025 or email@example.com.