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Is the Bloom Off the Rose?

By AICC Staff

January 30, 2019

As I write this column at the end of November, right at the starting line of the holiday shopping season, the race to the end-of-year box demand “bump” has just begun. E-commerce, it seems, is now expected to reliably deliver such a year-end boost, and many of the industry’s analysts now cook into their books an anticipated fourth-quarter increase. But wait, has this expectation run its course?

Some analysts writing at this time think it has. Mark Wilde of BMO Capital Markets, in his post-Thanksgiving rundown of the public companies’ prospects, says that “recent box volume is falling short of expectations, [and] 4Q’s e-commerce ‘bump’ isn’t as strong as 4Q17 or 4Q16.” He also raises a yellow flag for the containerboard sector, predicting that mill operating rates will fall from this year’s high-water mark of 97–98 percent to 90 or 91 percent by 2021. “Historically, we consider the market to be ‘balanced’ at 92–94 percent,” he writes.

Mitch Klingher of Klingher Nadler LLP also sounds a note of caution about the business in 2019. “Much of the growth in demand for containerboard products is tied to e-commerce, which is more in the realm of larger integrated companies,” he says. “If the economy in general stalls or goes into recession, 2019 will be a challenging year for independent converters.”

The reality of recent industry demand numbers, coupled with other economic indicators, is thus pointing to what could be a slowdown of one of the longest-running economic expansions in recent memory—and thus a slowdown in the containerboard, corrugated, folding carton, and rigid box sectors. The signs, they say, are popping up all around us: The housing market is sputtering, dragged down by escalating home prices and increasing mortgage rates; General Motors announced major layoffs at the end of November; and the stock market has displayed wild volatility in these fall months. Trouble in the housing and automotive sectors is a harbinger for slumps in the corrugated and packaging businesses, as these sectors and their supply chains are major consumers of corrugated board, while swings up or down in the stock market can have tangible psychological effects on consumer confidence and spending.

What can and should independents do in the face of these facts? “The best operators are preparing for this contingency now,” says Klingher, and a late-2018 “check-in” survey of AICC converting members tells us that they are taking Klingher’s advice. Nearly three-quarters of respondents reported planned investments in three areas: printing (flexo, litho, or digital); material handling; and software. Upgrading printing capability is a sure way for the industry to enhance the customer’s brand identities, especially in slowing economies when competition becomes much keener. Material-handling investments mean more efficient throughput for the plant, and if the economic conditions cannot support or justify a plant expansion, improve the layout and flow of what you have. Finally, software investments deliver more reliable production data, allowing more accurate price estimating, cost reduction, and improved profitability.

We live in a cyclical industry, and the most successful companies in it are those that read the signs and prepare. The Associate members of AICC, whose information about their products and services is included in the pages of this “Big Associate Issue,” are willing and able to assist in your preparation.

Happy New Year!

 

 

Steve Young

President, AICC”