North American box and containerboard demand should "emerge from its lethargy" in 2015 if consumer spending finally begins to pick up, RISI VP for paper packaging Ken Waghorne told attendees at RISI's 16th International Containerboard Conference (ICC) this week.
US box demand will grow 2.1%/yr during the 2015-2016 period after being stuck at less than 1%/yr growth since 2011, he forecast.
He said that the reason US box demand has lagged so far behind GDP is that "containerboard reflects conditions in nondurable goods manufacturing," which has been lagging overall economic growth.
But he notes that "the consumer is finally coming out of his shell and employment is accelerating, resulting in increased real wages and disposable income and more willingness to spend."
Competitive pressure, however, will remain on corrugated box shipments that are declining relative to nondurable goods production. A ratio of box shipments (ft2) per unit of nondurable goods production dropped from a high of almost 102 the first quarter of 2011 to 97 in the fourth quarter of 2014 and is expected to decline to 95 by the end of 2015.
Growth in containerboard apparent consumption, however, exceeded corrugated box shipments since 2009.
He expects North American containerboard demand to average 2.3% average annual growth in 2015-2016.
Total containerboard demand is also being helped by growth in export shipments, while overseas containerboard imports remain minimal. Latin America and Canada are the main destinations for US containerboard exports, while imports mainly come from Canada, Waghorne noted.
'Difficult decade' for producers.The improved outlook for containerboard demand would follow a "difficult decade" for North American producers when containerboard consumption fell from 33.2 million tons in 2003 to 31.6 million tons in 2013.
During this period, the share of consumption held by virgin linerboard declined from 53% to 48%, while semichemical corrugating medium declined from 20% to 18% and recycled containerboard increased from 27% to 34%.
PMs/conversions capacity add."High industry profitability has started to draw new containerboard capacity, particularly recycled, into the North American market," Waghorne said.
Waghorne expects 1.87 million tons of new containerboard capacity in North America from "identified" new mills or conversions of machines from other grades during 2013-2015.
He estimates another 400,000 tons will come in from "assumed" conversions or new machines over 2015-2016. In addition, another 1.5 million tons may be added during 2014-2016 from "capacity creep" due to optimizing existing machines.
"Conversions from the declining graphic paper sector provide a new dynamic for the North American containerboard industry," he said.
Since 2013, five North American newsprint machines have been converted to containerboard and other packaging grades.
'Moderate' consolidation.Nevertheless, he estimates the North American containerboard market has become "moderately concentrated" over the last several years due to industry consolidation such as RockTenn's acquisition of Smurfit-Stone Container in 2011 and International Paper's purchase of Temple-Inland in 2012.
Using the Herfindahl-Hirschman index used by the US government, industry concentration increased from a score of around 500 before 1998 to more than 1,700 in 2011-2014. The index regards anything below 1,500 as a "competitive market," Waghorne said.
Lofty profit margins.He said containerboard inventories remained "remarkably well balanced this year ... as North American containerboard producers have learned to keep capacity in line with demand."
Weeks of supply at the end of September, for example, were almost the same as a year ago.
North American containerboard profit margins (prices/variable costs) are at "the highest sustained level in more than a decade," according to Waghorne. He expects industry profitability to remain "quite high but this raises the potential for yet more capacity to be drawn into the market."