OAKLAND, Oct. 17, 2014 (PPI Pulp & Paper Week) -US box shipments rose 1.5% on an average-week basis in September while containerboard inventories dropped by 53,000 tons, according to the latest industry statistics. The better-than-expected industry data for containerboard producers and box makers cheered analysts but some contacts still wondered if producers will be able to hold prices through the seasonally slow winter period as more new board capacity starts up.
"It's going to be a challenge to absorb all the new capacity unless box demand continues to pick up this winter," one said.
There is already pressure on prices in the US Northeast and West Coast where box shipments have been the weakest and where the most new supply has been entering the market. The new supply comes not only from new and converted containerboard machines but also from mill ownership changes that shifted more previously integrated tonnage into the open market.
More than 500,000 tons of additional capacity may start up in the fourth quarter, following 1.2 million tons added from new or converted machines since the spring of 2013. Packaging Corp of America is scheduled to start up its 355,000 tons/yr containerboard conversion at DeRidder, LA, by Nov. 1. SP Fiber Technologies is also reported to be planning to start up its 200,000 tons/yr converted containerboard machine at Newberg, OR, in the fourth quarter.
"All those tons are looking for a home at some price during a period of relatively flat box demand," one trader said.
New supply also comes from a ratcheting down of International Paper's three-year off-take agreement to buy tonnage from its three former mills that are now owned by New-Indy and Hood Container. The agreement started at 900,000 tons in mid-2012, and has been dropping in increments (the latest July 1) and is scheduled to reach zero by mid-2015. Each year the agreement ratchets down, more tons are available for open market sale to independent converters.
While kraft linerboard is still reported to be in relative balance in the East, corrugating medium is in more oversupply -- possibly because it's the first grade produced by most of the converted machines, according to contacts.
Impact of strong dollar.Additional factors that may pressure prices include the rising dollar and declining input costs, according to analysts.
US producers have been able to push out excess containerboard tonnage into global markets but this may become more difficult with the recent surge in the dollar and slowing global economic growth, according to contacts. The spread between mill nets on domestic and export business has been widening due to price erosion on export prices.
"It also makes the two coasts (East and West) magnates for imports from countries with weak currencies and excess supply at home," one contact said.
Another factor in the competitive brew are declining old corrugated container (OCC) and energy costs, which make independent recycled containerboard mills more cost competitive against virgin integrated mills and able to maneuver on price, according to contacts. OCC costs dropped $27/ton nationally since last fall due to weaker demand from China, according toPPI Pulp & Paper Week.
Box shipments pick up.Latest industry statistics, however, provided some cheer for producers as box shipments showed signs of picking up and inventories dropped closer to average historical levels.
"The numbers are very positive," one analyst said.
Box shipments in September rose 6.6% to 30.936 billion ft2on an actual basis and were up 1.5% average-week (adjusted for one more shipping day this year in the latest month), the Fibre Box Assn (FBA) reported. Year-to-date box shipments were up 0.4% on an actual basis but down 0.2% average week, vs shipments for 2013 through September.
"September's 1.5% average year/year growth in average week box shipment was the strongest comp in 2014," Bank of Montreal analyst Mark Wilde said. "The gains were consistent with recent strength in industrial production of nondurables and the ISM manufacturing index."
Contacts said shipments were strongest in the US Midwest and Southeast but weakest in the Northeast and West Coast. Box shipments in California were particularly weak, with one area down nearly 5% per day so far this year, presumably because of the impact of the drought on agricultural box demand.
Inventories drop to 4.1 weeks.US containerboard inventories at box plants and mills declined 53,000 tons in September to 2.391 million tons, vs the total for August. The drop was larger than the average five-year seasonal decline of 4,000 tons, according to analysts.
"The absolute inventory level is 6% higher than the five-year September average (2.255 million tons) and 2% higher than the 10-year September average (2.349 million tons)," said KeyBanc's Adam Josephson.
September's weeks of supply total averaged 4.1 weeks.
"Over the last 10 years, September has averaged 3.8 weeks of supply, meaning that both on an absolute level and a weeks of supply basis, there is just slightly more than average inventory in the system," said Vertical Research Partners analyst Chip Dillon.
Mills hit 97.7% in September.US containerboard mills ran at a 97.7% rate in September, up from 95.8% in August, and a year-to-date rate of 96.1%, according to American Forest & Paper Association (AF&PA) statistics.
US containerboard production in September jumped 4.7% to 2.95 million tons from a year ago and was up 0.7% year-to-date. Recycled containerboard production rose 5.6% in September from a year ago and was up 4.3% for the first nine reflecting the startup of new and converted machines.
Linerboard production for export surged 10.3% to 368,000 tons, up 10.3% from a year ago.
Virgin/recycled price gap.Virgin containerboard prices remained under pressure in the Northeast and to a lesser extent the Midwest because of the $30-50/ton or larger price gap between virgin and 100% recycled grades, according to contacts.
This has been encouraging substitution of recycled for virgin grades.
"Independents say they can no longer afford to buy kraft linerboard and are only using it for boxes that require it," one trader said.
The trader estimated that about 70% of the Northeast market shifted to 100% recycled containerboard.
Major integrated mills are under growing pressure to at least partly match the lower prices or continue to lose more orders or even long-time customers, according to contacts. Some regional producers reduced prices mainly on recycled board in the first quarter in the Northeast to partly meet deeper discounts offered by some of the new startup machines and pressure is building again, according to one contact.
Eastern prices mostly stable.Unbleached kraft linerboard (42 lb) remain relatively stable in the low $600/ton range though a few more transactions may be at the lower end of the range, according to contacts. Recycled linerboard is reportedly selling for $570-580, with higher and lower prices reported.
Recycled medium prices are reported to be around the $550-560/ton level, with semichemical medium prices said to be slightly higher. Some pricing on recycled medium is reported to be down in the low $500/ton range, from startup or small independent mills.
Drought hurts ag boxes. Prices in California have come under pressure, especially on containerboard, boxes, and sheets sold into the Central Valley agricultural market where harvest of some crops such as melons has been hurt by drought. But business is reportedly stronger for agriculture converters closer to the coast and manufacturing customers.
More containerboard supply has also been coming into California from some mills on the East Coast that looked for outlets for their production despite a high cross-country freight cost. Offshore suppliers from Australia, Europe, and China have also been active (the latter two mainly on white top grades) but labor problems have made it difficult to move containers out of the port of Long Beach, according to contacts.
West Coast price pressure mixed.One California converter close to the Central Valley reported being approached by some large integrated producers, and eastern US and offshore mills with discounts of $10-20/ton on kraft linerboard as well as medium, with even deeper discounts on large spot buys. The contact said mills seem to be "positioning themselves" for the seasonally slower winter period and perhaps a slowdown in export business.
But another large California converter told of not seeing that many "competitive offers." The converter mainly buys under long-term contracts and held plenty of inventory. The contact said that business has been strong from a mainly manufacturing customer base, but was concerned about "bleed over" from the weakness in agricultural box demand.
A mill supplier said West Coast orders have been strong, but box customers claimed discount offers for kraft linerboard -- and some have not placed orders -- indicating "they must be getting paper from somewhere at a lower price."
In the Pacific Northwest, where competition is less intense, a box converter said business was busy from the apple harvest and linerboard prices remained close to published levels.