OAKLAND, May 16, 2014 (PPI Pulp & Paper Week) -After a slow first quarter impacted by weather and flat economic growth, US box shipments picked up slightly in April, while mills eased back on operating rates to just below 95% and containerboard inventories tumbled 92,000 tons, according to the latest industry statistics.
But inventories remain on the high side and recycled containerboard prices remain under pressure from more than one million tons of new startup tonnage entering the market since last spring, according to contacts.
"The latest statistics are a step in the right direction but the market is very fragile," one contact said, pointing to a growing gap between virgin and recycled containerboard prices.
"It's still soft out there," another contact said. "And there is plenty of paper."
Box shipments in April totaled 30.712 billion ft2, down 1.2% from a year ago, but 3.5% higher on an average-week basis, adjusted for one less shipping day this April compared with a year ago, the Fibre Box Assn (FBA) reported.
On a seasonally and working-day adjusted basis, April shipments were up 0.8% sequentially from February/March levels and were the strongest since last November, according to RISI VP for packaging Ken Waghorne.
Year-to-date box shipments were down 0.3% on both an actual and average week basis from the first four months of 2013.
US consumer nondurable production eased down 0.3% in April, with food and beverage output, which accounts for roughly half of box demand, relatively flat, according to the latest US Dept of Commerce figures.
"We're seeing a pickup in box demand but it's hard to say if it's seasonal, pent up demand from the (weather impacted) first quarter, or improvement in the economy," one larger Midwestern converter said. "But the pickup is less than you would expect."
Inventories drop 92,000 tons.Containerboard inventories at box plants and mills declined 92,000 tons from the previous month to end April at 2.421million tons. The decline is larger than the average five year decline of 71,000 tons and 10-year drop of 57,000 tons, according to KeyBanc analyst Adam Josephson.
Total inventories remain "elevated" and "haven't been this high in April since 2007," noted Deutsche Bank analyst Debbie Jones.
Josephson estimates that the total inventory level is 9% higher than the five-year April average (2.223 million tons) and 4% higher than the 10-year April average (2.336 million tons).
Weeks of supply dropped from 4.4 weeks in March to 4.2 weeks in April.
94.7% operating rate. TheUS containerboard mill operating rate eased to 94.7% in April from a revised 95.9% March and averaged 95.3% for the first four months, according to American Forest & Paper Association (AF&PA).
Linerboard mill operating rates pulled back to 92.7% in April from 94.8% in March and about 97% in February, reflecting maintenance and project downtime such as RockTenn's rebuild of its Hopewell, VA, linerboard machine, which was down all of April.
But corrugating medium operating rates in April rose to 99.6% from 98.9% in March, which may reflect why medium seems to be in the most current oversupply, one contact noted.
Producers have said that they needed to build inventories for spring maintenance outages. But some believe mills are operating at too high a level.
"If mills continue to run at 95%, this could all come to a bad ending," one trader said.
Recycled production up 6.5%.Total US containerboard production in April was down 0.8% to 2.783 million tons from a year ago but up 0.8% year-to-date. Linerboard production in April was down 2.0%, while medium output was up 2.0%.
Recycled containerboard production was up 6.5% in April and 3.9% year-to-date reflecting the ramp-up of Norampac's new Greenpac recycled linerboard mill in Niagara Falls, NY, and incremental tonnage from SP Fiber Technology's Dublin, GA, newsprint conversion.
Ramping up to full capacity.Greenpac, which began production last July, is currently running around 1,300 tons/day and on "great days" has hit as high as 1,600 tons/day, a Norampac executive said in its latest conference call, indicating the mill is close to reaching its announced capacity of 540,000 tons/yr.
Norampac expects the full ramp up to be completed in "six months or less" and said "logistics problems" of shipping product out have been resolved but costs have been higher than expected for delivering paper longer distances.
"The product is well received in the marketplace," the Norampac executive said, "and making trial runs on specialty grades."
SP Fiber is also reported to be running its 400,000 ton/yr No. 2 machine at Dublin near full capacity and is making a good sheet, one contact said.
Capacity to grow 1.5%.TheAF&PA's latest industry capacity survey estimates US containerboard capacity will rise 1.5% this year to 36.9 million tons following 0.2% growth in 2013. The survey for the first time did not project capacity for two years beyond the current year.
Linerboard capacity is forecast to rise 2.2% this year to 26.7 million following 1.1% growth in 2013 from the Norampac machine, SP's newsprint conversions, rebuilds, and swings from medium.
Corrugating medium is estimated to remain flat this year at 10.2 million tons (down 0.1%), after a 2.0% decline in 2013.
The AF&PA said "swings to linerboard, closure of a machine in 2012, and product mix changes more than compensated for additions to capacity from conversion projects."
The survey in 2014 included SP Fiber's plan to convert a newsprint machine at its Newberg, OR, mill to 200,000 tons/yr of recycled containerboard and bag paper grades this summer, and Packaging Corp of America's plan to convert its D-3 newsprint machine at DeRidder, LA, to 355,000 tons/yr in November. Most of the impact from the PCA project is to occur in 2015. Pratt Industries plans to complete its new 360,000 tons/yr recycled containerboard mill in Valparaiso, IN, in 2015.
Still under study are Kruger's plan to convert a newsprint machine in Quebec to containerboard and SAICA's plan to partner with a US company on a new greenfield recycled mill.
Virgin/recycled price gap widens.The normal price gap between virgin and recycled containerboard grades has widened since last fall as more new startup tonnage has hit the open market, contacts said.
Smaller independent producers reduced recycled containerboard prices $20-30/ton since last fall to partly meet even deeper discounts on some of the new startup tonnage.
"Existing players are trying to save chunks of business threatened or displaced by the new supply," one contact noted.
The discounting spread from the US Northeast into the Midwest and other regions as the startup mills ramp up and ship to reach new customers. The discounts first appeared last fall, but the market situation has not changed much recently, one contact said.
Integrateds reluctant to blink.Major integrated companies have held their virgin prices steady and are "reticent to acknowledge" the discounting on recycled containerboard grades even in selling their own 100% recycled linerboard and medium, another contact noted.
"Whatever, if anything, they are offering in response to customer pressure has been limited and selective," the contact added. "They are reluctant to blink."
The result is a considerable variation in prices among producers, customers, and regions, and a widening in price spreads which normally happens in a soft market, according to contacts. One contact said the current range in semichemical medium prices is as much as $50/ton.
While small- and medium-sized converters have not received discounts on virgin grades, this may not be the case for large converters, one contact said.
Wide price spreads.Prices for 42-lb unbleached kraft linerboard remained $625-635/ton in the eastern US, with semichemical medium averaging $575-585 but in a large range. Recycled linerboard prices range from $560-590/ton, down from $600-610 last fall. Recycled medium ranged from $550-560/ton, but with some prices down to $530-540 particularly on startup tonnage, according to contacts.
Integrated producers are reported to be at the high end of these ranges and even higher, but have been losing orders, contacts report. RockTenn, the major integrated hardest hit by the new startup tonnage in the Northeast, reported its third-party domestic containerboard sales were down 19% in the March quarter.
"Major integrateds in some cases are pulling back from selling recycled containerboard in the open market and using it in their own box plant systems, freeing up more virgin linerboard and medium for export," one contact noted.