Box buyers still have plenty of options even as the number of suppliers shrinks. Why?
Remember when box prices rose in tandem with containerboard prices? Sure, a 30 or 60 day lag existed and the box price increase didn’t always go up as much as the board price increase. But the trend was pretty consistent.
Well, recent industry consolidation has smashed this trend to pieces. Over the past few years, containerboard supply has shrunk while box supply has remained abundant. The end result is a real squeeze on profit margins, especially if you’re an independent box maker.
While it is true that box prices have been rising following a $50 per ton containerboard price increase in September, the reason for this has more to do with box buyers knowing it has been more than two years since their box prices last increased than it does with the aforementioned trend.
How containerboard and box prices relate to each other is a very touchy subject right now, particularly with the current containerboard price fixing lawsuit hovering over everyone’s head. In a nutshell, this lawsuit says that the link between the two is so close that every time integrated board mills take downtime to manage supply, they do it in a coordinated fashion that ultimately leads to higher containerboard and box prices.
Many industry executives were only willing to speak anonymously on this subject. Whether on or off the record, they all agreed that right now the battle for box market share is more brutal than it has ever been.
“There’s no question that over the past 18 months we’ve seen declining box prices,” states Mike Siegel, president, Evergreen Fibres, Branford, Conn. “It speaks to the consolidation on the containerboard side of the business at the mill level.
“When you talk about margin squeeze, I’ve had more than one [independent corrugator] customer of ours, family-owned businesses, who told me that 2011 was the first year they showed a loss.”
Companies go out of business or are bought all the time, of course, for a variety of reasons. But why are some multi-generational, independent box makers still struggling, even after the Great Recession?
The Big Squeeze Is On
The answer focuses on the raging battle over finished box market share, which is sure to only intensify. One independent box maker, who wishes to remain anonymous, shared a telling anecdote.
About a year ago it won business from a “widget” manufacturer because International Paper (IP) didn’t serve it well. But then the situation changed, thanks to IP’s $3.7 billion acquisition of Temple-Inland in February 2012.
“The next thing we know, IP is back in again,” he says. “They say to the buyer, ‘Inland had some prices in here, didn’t they?’ The buyer said, ‘I used to buy from Inland. Then you came in [pre-merger] and you were higher than them. But I liked the quality so I moved to you.’ So now the buyer is with us at the same prices IP had. Then [post-merger] IP decided to give him Inland’s [old] prices. Isn’t that brilliant?
“That’s local management trying to maintain market share at any price based on, ‘Hey, nobody’s watching us right now. Until top management tells us that we have to be the leader, we’re going to be as bad as Inland was.’”
It’s an Old Problem
Box making overcapacity has existed for years. One independent box maker on the East Coast believes even eliminating 40 U.S. box plants wouldn’t balance the supply and demand picture.
“When the price of [containerboard] doesn’t change or we’re getting a little better deal on containerboard but don’t want to broadcast this to the customer, box buyers will find the hungry guy,” he says. “They will do what buyers do and they will do it well: get price out of the box. So what you get over time is margin compression.
“The more time that goes by [without a containerboard price change] the worse it is for the converters. The enemy of the converter is a stable containerboard market over an extended period of time.”
Put It Out to Bid
Box buyers usually write long-term contracts with “out” clauses, giving them the opportunity to put their business out for bid. But there’s risk involved doing this.
“To some degree you do it at your own peril in the sense that service and quality may be inconsistent as you move from supplier to supplier,” states Evergreen Fibre’s Seigel. “I think it’s a bad way to do business. But if you want the best box price, you put it up for bid every time.”
It boils down to the weakest box seller. Any decent buyer with any kind of volume at all will find that very low cost producer (usually an integrated) who is willing to keep its machines running and keep its people working 40 hours a week. What will it do with all those extra boxes? For years independent box converters have been saying it will sell them at a discount. And that happens all too often, they add.
The argument has been made by more than one box maker that (until recently) the past two and a half years of stable prices was a terrible time to be in the business because a lot of other costs, including utilities, freight, healthcare, and wages, were rising. If you can’t get a containerboard (followed by a finished box) price increase through, all you can do is absorb the aforementioned price increases.
“We always want to think, ‘What’s that guy doing selling at that price, he must be losing money,’” states the East Coast independent, who wishes to remain anonymous. “They almost never are. Instead you’re losing a piece of business to a guy that has a better cost structure than you do. Maybe he doesn’t make a lot of money but he’s probably not losing money. That hungry guy is…pricing aggressively to stay busy.”
So the spotlight then focuses on the quality of the salespeople in the corrugated box making industry.
The fundamental problem is too many veteran salespeople have followed the path of least resistance when they can get away with it. They don’t want to upset their customers unless they are forced to or unless they really have a compelling story to tell. So for years they have been pulling out one of two industry trade publications: Pulp & Paper Week or Official Board Markets (see sidebar for more on this). In October the two publications merged.
You would think that major buyers of corrugated boxes would be very concerned about the two most recent box making mergers: IP buying Temple-Inland and RockTenn buying Smurfit-Stone Container Corp. Think again, says John Tatum, ceo, Heritage Paper, Livermore, Calif.
“If there are four major suppliers out there, they all will always want the business,” he states. “Probably only two could service most [major box buyers]. So it doesn’t matter how many there are. They will still just quote and ask themselves, ‘How low do we think we have to go?’ If they lose, they assume they didn’t go low enough because it’s all about price for the integrateds today.”
Is this too cynical a viewpoint? Many of Tatum’s peers would agree with him. But it would be a big mistake to say that all box buyers feel their world hasn’t shifted since the most recent mergers.
One major buyer, who wishes to remain anonymous, recognizes that these mergers affect box inventory and capacity levels. Simply put, more box making control is going into fewer hands.
“We love the industry and we have good relationships,” he states. “We want to help it but we don’t think that this level of consolidation is healthy.”
While this executive’s company may love the industry, it is constantly looking at ways to reduce its corrugated box consumption. But it is going to buy a certain box quantity simply because boxes are the best way to safely transport items through the supply chain.
“If the industry becomes so lopsided that the price is no longer rational, we think that looking at more regional box makers, and even independents, gives other folks a lot of opportunity,” he says.
For example, his company recently purchased a large food company that had two plants primarily served by IP. His company put the box business out for bid; Packaging Corp. of America wound up getting most of it because of margin equalization.
“It’s not that we don’t have a good relationship with IP,” the executive stresses. “We’re going to have to use them and want to maintain that relationship. But we also mitigate our risk by looking at other people.”
“Consolidation is good for the industry if it results in pricing discipline,” states another box buyer who also spoke anonymously. “But it can become dangerous for suppliers in that it becomes easier for them to force [price increases] through just because they can.”
He adds his box suppliers will complain to him that he’s using competition to reduce their margins.
“But at the end of the day that’s what markets do, they require people to continually innovate to improve their cost structure,” he states. “The [box] suppliers seem to be quite happy with the ‘us versus them’ mentality. I guess they’re trusting that that will continue to work for them. I wish we could get more towards a cost focus system so that there would be increases when costs are up and decreases when costs are down. Then we’d start working a little bit more together versus against each other.”
Like the first box buyer, this executive recognizes the strength that corrugated boxes provide in getting his company’s goods safely to their destination. He also acknowledges the industry’s great sustainability story. But a key disadvantage is the physical space boxes takes up when compared to a roll of film, he notes.
“You’re going to increase people’s desire to get away from corrugated if costs are going up,” he says. “People are going to feel taken advantage of. Most big companies do not mind being in markets where they have to pay their way when costs go up. But you’ll get emotions going if [box buyers] feel like prices are going up and they have very little power to do anything about it. That becomes frustrating. The industry needs to be careful now.”
Consolidation in any industry will have opponents and proponents. But no one can deny that it has given the box making industry more stability: Earnings volatility has diminished, for example. However, what has happened to box prices over the past couple of years?
“Box prices are probably down $20 to $30 over a two-year period, the same period in which containerboard prices have essentially been flat,” states Mark Wilde, paper industry analyst, Deutsche Bank, New York. “Even the integrateds have been somewhat squeezed because most of them sell more boxes than they sell containerboard.”
But if you’re an independent box maker that makes money by selling just boxes, how do you survive being squeezed out of business?
“Independents will need to change the way they align themselves with containerboard supply,” says a containerboard broker on the East Coast who wishes to remain anonymous. “In the future they will become more interested in the shared risk of owning capacity. They don’t have $250 million in their pockets to build their own [board mill]. They might not be able to own it but they’re all concerned; they need to do something different.”
This most recent round of industry consolidation has shaken up the box selling playing field yet again. You could argue all day who the winners and losers will be (independents? integrateds?), but ultimately it’s the intrinsic value of the corrugated box in the eyes of end users that takes a beating. Yet again. PBP