The famous 19th century Scottish author Thomas Carlyle referred to economics as “the dismal science,” and although there is much speculation as to why he coined this disparaging phrase, it does seem like economists are always forecasting doom and gloom.
In reality, economics does not really rise to the level of a “science” in that its assertions and underlying principles cannot be proved by employing the scientific method, so it has been relegated to the status of a “social science,” which is defined as a branch of academic study that deals with human behavior in its social and cultural aspects. Right now, a lot of doom and gloom is being predicted for the overall economy and its corrugated packaging segment.
Market analysis is a macroeconomic analysis that examines market size, competitors, pricing, and customers. It includes quantitative data about market conditions and customer behavior, and discusses the state of a particular industry. Microeconomics is the branch of economics that considers the behavior of decision-makers within the economy such as individuals, households, and firms.
Let’s take a look at the current macroeconomic state of the containerboard industry market:
The year 2024 was characterized by very little growth in corrugated box shipments; those levels are close to what they were six or seven years ago.
More than 2.5 million tons of recycled linerboard capacity has entered the North American marketplace; even more virgin linerboard capacity has been removed.
Worldwide containerboard markets have tremendous overcapacity—possibly 30 million tons—and foreign containerboard has begun entering North America in volumes never before seen.
Notwithstanding the sluggish demand for containerboard and the oversupply in almost all markets, Fastmarkets RISI has recognized two price increases in the past nine months. Forty-two-pound kraft containerboard now has a list price of approximately $950 per ton, and recycled liner is reported to be selling approximately $100 per ton less. Many deals are likely being transacted at a deeper discount.
The Institute for Supply Management has reported that its manufacturing price market index is below 50 and dropping, which generally indicates a contraction in the manufacturing sector of the economy.
The price of old corrugated containers, the basic raw material for recycled paper, continues to drop and is at its lowest levels in years.
Pulp, the basic raw material for virgin paper, is similarly at low levels.
The price of the basic raw materials for making paper is low, and the high inflation that has characterized the other major costs of papermaking companies (utilities, wages, delivery, etc.) has ended. Costs are down significantly, supply is still high, and demand continues to be low. Classical and Keynesian economic theory hold that when demand is low and supply is high, prices should be declining. With costs also declining, it becomes more and more difficult for converters to go to customers and ask for price increases. Yet, prices are increasing and getting closer and closer to $1,000 per ton. No one knows at what levels customers will begin to move their packaging choices to other materials, but $1,000 per ton may the “Rubicon” that, once crossed, will begin to accelerate this thinking. Although I am not a proponent of deflation in the prices for paper-based packaging, the acceleration of the price beyond the inflation levels seen in the rest of our economy will likely become problematic if this trend continues.
In the face of all of this dismal macroeconomic news, I still see a vibrant and profitable business that continues to thrive and prosper. The microeconomic decisions that companies have made in the past few years have largely been responsible for this. Microeconomic theory holds that producers should seek to operate at the low point of their long-run average cost curve. Doing this will maximize the economies of scale that are available to them. While this nebulous concept is hard to envision in real life (I don’t know of anyone who actually has a published long-run average cost curve), most independent packaging companies have used the large profits they made during the COVID-19 pandemic to invest in their businesses. These investments will lead to a reduction in their long-term average costs and thus increase their long-term profit potential. They have stronger balance sheets and have more efficient plants, better equipment, and improved systems, and are better prepared for the future. They understand their niches well and continue to exploit them. Independent converters take on the difficult business that requires multiple machine centers, high graphics, tight tolerances, hand work, smaller quantities, and tighter delivery time frames. They aren’t simply setting up their equipment and letting it run all day and night on a smaller number of orders.
When I first got involved in this business, the rule of thumb was that the independent sector of the business accounted for approximately 20% of all shipments. At the end of the day, the more difficult orders are generally better served by independent companies, which are not constrained by trying to fill up their paper mills, and while larger companies will often try to take this type of business, it usually ends up coming back to the independent converters. No one really knows what the percentage of the marketplace for packaging is currently being serviced by independent companies, but I see more data than probably anyone in the U.S., and based upon what I see, their businesses are growing. I have results from the four CEO groups that I facilitate, and although this is hardly a valid statistical survey of independent converters, this group of about 35 companies showed a growth in volume for 2024 over 2023 of approximately 7%. That’s not bad for a year in which the industry showed almost no growth at all.
No one can predict the future effects of tariffs and the trade wars they may trigger. The supply of containerboard is still sorting itself out, and I expect to see more mills shuttered in the future if demand does not begin to increase. Irrespective of any of this, from what I see, the independent sector is vibrant and growing, and the decisions they have made in the past few years should help this continue well into the future.
Mitch Klingher is owner of Klingher Nadler LLP. He can be reached at 201-731-3025 or mitch@klinghernadler.com.
