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Containerboard: Box demand not bad for many players, inventories jump, mill rates hit 99%

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Containerboard: Box demand not bad for many players, inventories jump, mill rates hit 99%

July 19, 2013 - 11:57

SAN FRANCISCO, July 19, 2013 (PPI Pulp & Paper Week) -North American box demand has been fairly healthy for many integrated and independent converters, while containerboard is still in fairly tight supply, according to contacts.

"Many mills are still behind on shipments and the market will soon be going into the seasonally strong late-August-to-October period," one contact noted. "Mills are oversold, but not as much as last spring."

But industry statistics for June painted a less rosy picture, leaving some contacts searching for a reasons for the "disconnect." US containerboard inventories jumped by 83,000 tons in June from the prior month as mill operating rates hit 99%, while box shipments remained sluggish, the Fibre Box Assn (FBA) and American Forest & Paper Assn (AF&PA) reported.

Containerboard inventories at box plants and mills rose by 83,000 tons to 2.225 million tons at the end of June, according to the FBA and AF&PA statistics. This would compare with an average 10-year decline of 16,000 tons for June, a nearly 100,000-ton "swing" from their average historical decline, noted Vertical Research Partners analyst Chip Dillon.

Box plant inventories jumped by 48,000 tons in June, while mill inventories rose by 36,000 tons. Weeks of supply for box plants and mills edged up to 3.8 weeks from 3.7 weeks at the end of May.

The jump in June inventories reverses a four-month decline of 242,000 tons from 2.384 million tons in January to 2.142 million tons at the end of May. Dillon said that last month's jump in inventory is "quite understandable in light of this June's below normal shipping days, above average operating rates, and sluggish box shipments."

"The question regarding inventories is whether they will remain near the balanced level as new capacity hits the market during the second half of the year," said RISI VP Packaging analyst Ken Waghorne.

Box shipments -- how sluggish?US corrugated box shipments dropped by 5.4% to 28.924 billion ft2on an actual basis, but average-week were down 0.7% (adjusted for one less shipping day this June, which had 20 days vs 21 days a year ago), the FBA reported.

For the first half of this year, box shipments were down 0.4% on an actual basis, but up 0.4% average week (adjusted for one less shipping day in this year's first six months).

Box hike easier than expected?Nevertheless, many integrated and independent converters in the East report that box demand has been healthy and the latest box price increase was easier to implement than earlier feared. Independent converters earlier indicated they expected to gain about 5.5% to 7% of the price increase and success of major integrated producers is to be detailed on conference calls next week.

End use customers were incensed that the latest box price increase came not much more than six months after the first price increase last fall, and was not "justified" by increases in fiber, energy, and other input costs. The increases followed $50/ton price increases on continerboard in April and last September -- for a total of $100/ton in less than a year or eight months.

"These rapid containerboard price increases are really hurting our profit margins and are hard to pass on to customers," a buyer for one Midwest end-user company said.

But overall the latest increase appears to be settling in with few ripples.

"There has really not been that much shopping around of box business," one box producer said. "Where can customers go? It's all pretty quiet now."

IP lifting other box players?Packaging Corp of America (PCA) -- the first company to report second quarter results this week -- said its box shipments rose 5.2% in the second quarter on a workday basis and without any help from box plant acquisitions -- and box demand was "off to a strong start" in July. A company official said during the earnings call that the firm achieved "full pass through" on the box price increase that was completed in June.

Next week, RockTenn (RKT) and International Paper (IP) are to report results.

One factor that has been possibly "helping to lift other boats" in the box market has been IP's 4-5% year-over-year decline in box shipments in recent quarters likely resulting from its 2012 Temple-Inland acquisition, one contact said. The merger caused some box buyers to seek alternative sources of supply to diversify their supplier base or because of IP's efforts to reportedly pull up low prices from former Temple-Inland business in markets such as Texas and California.

Mills run at sizzling 99%."US containerboard mills ran virtually full, posting a 99% (operating) rate, the highest since the summer of 2010," noted Richard Storat in "Scoring Boxes."

Linerboard mills ran at 98.6% in June (with kraft liner at a scorching 100.6%) and medium mills at 99.9% -- causing some comments that industry capacity figures may not be capturing all of the mill "creep" or swing from other grades.

The rise in operating rates likely reflects winding down of spring maintenance and project downtime, and need of mills to build inventories before the late-August-to- October seasonally strong period. Producers said they want to carry higher inventory levels to avoid logistical snags that crimp profitability.

Sold out, just not as much. Nevertheless, mills are still running behind on shipments and customers are still running low on supply for certain grades, contacts said. One integrated producer said that a recent "survey" of the company's North American trading partners found that on average they were more than 12 days behind on shipments, although this was down from 20 days in April/May.

Customers counting on tonnage from recently converted machines have been scrambling for temporary sources of supply because of reported slower than expected production ramps.

After starting up in April, SP Fiber Technologies' No. 2 machine at Dublin, GA, that used to make newsprint is reportedly a bit more than half way up its startup curve to 1,100 tons/day. In addition to containerboard, PM 2 is also producing bag paper. Atlantic Packaging Products, which announced its startup of its Whitby, ON, newsprint machine conversion in late May is said to have only recently begun to ship recycled corrugating medium to outside independent box customers in eastern Canada, and has not begun to produce linerboard on a regular basis, according to some contacts.

Growing European imports.The tight supply situation, $100/ton rise in US prices over the past year and sluggish demand in Europe is attracting a growing trickle of European lightweight recycled containerboard (mainly medium) into ports on the East and West Coast of North America. Supply from Western European mills and even Israel arrived at ports in Montreal, QC; Newark, NJ; Wilmington, DE; Seattle, WA; and Long Beach, CA to fill the supply gap. A major Chinese producer also sent a small amount of containerboard (reportedly 3,000 tonnes) into the Port of Long Beach for sale by a European broker.

The amount of European import tonnage is probably the highest ever to come into North America, but is only "a drop in the bucket" but the recycled brown grades will probably mostly "leave the scene" once new domestic recycled capacity ramps up, according to contacts.

One trader estimated that the recycled imports could total 100,000 tons this year above what is normally traded with Canada or imported from regular suppliers such as Australia's Visy to the US West Coast, Europe's Metsa Board formerly M-real (white top linerboard) and PowerFlute (high performance semichemical medium). Another contact estimated that imports from Europe are currently running at 30,000-35,000 tons/month. Mid-sized integrated producers and independents are importing the tonnage.

(Such numbers are far higher than US Census Bureau import statistics, but these may not pick up many of the import shipments due to coding errors, one contact said. Visy, for example, is believed to be exporting close to 100,000 tons/yr of kraft linerboard to the USA, but government statistics show total US containerboard imports last year at 62,000 tons.)

Mexican standoff?US kraft linerboard export producers implemented at least $25/tonne of their announced $50/ton price increase in Mexico, with hopes of pushing through the remainder in July. That brought the price in June to $635-655/tonne at the Laredo border, but further movement appears unlikely until August or September as demand seasonally improves, contacts toldPPI Latin America.

Local Mexican producers have been struggling to raise prices by $40-50/ton, but face resistance from converters in passing through the price increase in finished boxes, according toPPI Latin America. US kraft linerboard exporters, in some cases, said they have implemented full $50/tonne price increase in Mexico on both large and small customers.

Mexican containerboard consumption in the first quarter was up 5.3% from a year ago, according to Mexican association Camara statistics. But more import supply is entering Mexico from Europe and other countries, which have becoming increasing active in Central and South America.

European recycled price hike.European recycled containerboard producers began to announce Euro 50/tonne price increases in Continental Europe effective with shipments Aug. 1 following recent mild price erosion. Among producers to announce the increase were Smurfit Kappa Group, DS Smith Paper, SAICA (for Italy), and Hamburger -- the four largest European recycled containerboard producers. Producers cited an improved supply/demand balance, lower inventories and cost pressure for the latest increase.