US containerboard mills pull back from inventory brink; prices stable, but some pressure going into yearend

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US containerboard mills pull back from inventory brink; prices stable, but some pressure going into yearend

October 18, 2013 - 12:05

OAKLAND, Oct. 18, 2013 (PPI Pulp & Paper Week) -US containerboard inventories dropped by 47,500 tons in September as mills downshifted on production and actual box shipments increased because of an extra shipping day, according to latest industry statistics released this week.

That reversed the three-month June-August 338,000-ton surge in inventories in which mills appeared to overshoot on production in an effort to rebuild inventories to more comfortable levels after tightness in supply last spring, according to contacts.

"Producers really took it right up to the edge of the cliff," one contact said. "We won't know until the end of the year whether prices weaken or not. Right now it's a jump ball."

Contacts this week said that price levels so far in the US East held firm through the seasonally strong fall period despite the inventory build and new startup tonnage reportedly at discounted prices from several new or converted containerboard machines. The one exception is on the West Coast, where the $30/ton premium on corrugating medium pushed through last spring is under pressure, contacts said.

The 47,500-ton drop in containerboard inventories compares to an average 2,000-ton increase for the month of September over the past decade. The decline put inventories at 2.43 million tons, equal to 4.2 weeks of supply, according to the Fibre Box Assn (FBA) and American Forest & Paper Association (AF&PA) statistics.

Inventories were still the "highest for September in five years (or since 2.446 million tons in September 2008)," according to Vertical Research Partners analyst Chip Dillon. "Weeks of supply were the highest since September 2004."

Box shipments sluggish.August box shipments totaled 29.005 billion ft2, up 2.5% from a year ago on an actual basis, but down 2.2% average-week adjusted for one more shipping day in the latest month.

Actual box shipments year-to-date were flat, but up 0.5% on an average-week basis when adjusted for one less shipping day this year.

Containerboard mills, particularly ones making kraft linerboard, downshifted production in September by 8.9% from the previous month although output of 2.83 million tons was only down 0.1% from a year ago, according to the AF&PA statistics.

Containerboard operating rates fell to 93.8% in September from 99.7% in August and below their year-to-date average of 96.6%. Operating rates for linerboard mills dropped to 92.5% from 98.4% in August.

"Independents are fully stocked after receiving a lot of shipments in late summer and early September after ordering more because of tightness in the market earlier this year," one contact said. "As a result, orders have slowed down (and) some mills are scratching for business."

"We have more people knocking on our door," one East Coast independent converter said.

"Everybody seems to be shipping everything on time," a trader said.

Stemming the tide?Nevertheless, producers are likely to continue to take market-related downtime during the fourth quarter to keep supply in balance with demand, according to most analysts.

International Paper (IP) has had both machines at its 2,540 tons/day Rome, GA, kraft linerboard mill down for 45 days for maintenance. One contact said the mill may come up this weekend, which would result in an estimated production loss of nearly 115,000 tons. Originally the mill was scheduled to have a 25-day shut.

RockTenn reportedly had its Seminole recycled containerboard mill in Jacksonville, FL, curtailed for two weeks for what the company reportedly described as "economic downtime." Estimated production loss would be about 23,000 tons from Seminole, which the company regards as a "swing" mill easy to take up and down.

"The June-to-August run-up in inventories and new capacity entering the market has created the perception in the mind of converters that prices may weaken later this year," one contact said. "Producers had to do something dramatic to stem the tide."

New startup capacity.About one million tons of new capacity is entering the market from the new Norampac partnership Greenpac machine in Niagara Falls, NY, and two newsprint conversions (by SP Fiber Technologies at Dublin GA, and Atlantic Packaging Products at Whitby, ON). All three machines started up from April to July and have been climbing up their production curves, according to contacts.

In addition, two new entries created by IP's spin-off of three board machines to complete its Temple-Inland acquisition last year are also in the market trying to line up customers, contacts said. The former IP mills are now run by Hood Container (in New Johnsonville, TN) and New- Indy (in Ontario and Oxnard, CA). New-Indy is a joint venture between the Schwartz and Kraft groups. IP spun off the mills with 970,000 tons/yr of combined capacity to comply with a US Dept. of Justice order to complete the acquisition. But one-third of IP's three-year off-take agreement to buy production from the mills expired in July, freeing some tonnage to be sold in the open market (though parties have reportedly been trying to smooth the transition), according to contacts.

The startup machines and new players are reportedly offering introductory prices to lock in new customers, according to several contacts. Most of the new tonnage is recycled containerboard.

But so far, there has been "no discounting by second tier recycled mills in the East," according to one trader.

"But customers are expecting it later this year on recycled grades," the contact said.

Pricing mostly stable in East.Unbleached kraft linerboard prices (42-lb) are still reportedly close to the $625-635/ton "open market" PPI Pulp & Paper Week Price Watch level. Recycled linerboard prices (23 lb) are reported to be in the $590-610/ton range, but lower in the Northeast because of the new startup tonnage, according to contacts.

Semichemical medium prices (26 lb) in the East are reported to be close to the Price Watch $575-585/ton price, but slightly lower on 23-lb recycled medium, particularly in the Northeast.

West Coast medium price under pressure.On the West Coast, the $630-640/ton premium price on 26-lb semichemical medium has been under pressure in the large competitive Los Angeles market, according to contacts. Producers in the late spring of 2012 were able to push through a $30/ton upward price adjustment on medium because of tightness in supply due to underlying lack of production capacity in the West. But converters were unhappy about it because of difficulty passing through the medium-only increase onto boxes.

"There's no question that medium supply in the region is not as tight as it used to be," one supplier said.

But the contact was "not seeing" any downward movement in prices in the Los Angeles market.

Another seller said that price levels in the Los Angeles market seem to be more at $600-610/ton.

And a larger converter in Southern California told of being able to buy tonnage at discounts from a new market entrant and offshore suppliers. Imports of medium have been coming into the Los Angeles market from Chinese, Australian, and European mills, contacts said. As a result, the converter was pressuring regular suppliers to lower prices.

And more medium supply will likely be coming westward from eastern US mills because of current high inventories and seasonal slowing in demand during winter months.

"Eastern mills can't export recycled medium but they can ship it to California," one contact noted.

Open market price levels in Northern California and the Pacific, Northwest, however, appear to be holding, but these markets have lower open market volume, according to several contacts.

As a result,PPI Pulp & Paper Weekis showing a $15/ton reduction in the 26-lb semichemical medium West price in the October Price Watch.

Higher exports ahead?US linerboard export shipments have been held back earlier this year by tight supply. Linerboard production for export in September totaled 319,000 tons, up from 311,000 tons in August, down 0.5% from a year ago, according to AF&PA statistics. Year-to-date US linerboard exports were down 1.6% from a year ago.

But with high inventories in the US and recent weakness of the dollar against the Euro, some contacts expect linerboard export shipments to pick up later this year and possibly pressure export prices. Prices on linerboard exports to southern Europe and South/Central America eroded about $20-25/ton in late summer from highs reached last spring, but may have stabilized somewhat because of seasonally strong fall demand, according to some contacts. One large company said that their overall global export prices even firmed slightly in September.

SKG hikes in Europe.Smurfit Kappa Group (SKG) and DS Smith this week announced Euro 30-40/tonne increases on recycled containerboard for continental Europe effective Nov. 1. Earlier, several smaller producers announced increases of Euro 30-40/tonne for Oct. 1. This would be the second price hike attempt after producers were able to push through Euro 35-40/tonne increases in August/September, according toPPI Europe.

SKG, the largest producer in Europe, said the latest announcement "takes place in a context of high production costs and strong demand."

But a US export trader is seeing "quite a bit" of supply offers in southern Europe for November. Converters in some cases are asking for another Euro 10/tonne price reduction following price reductions of about Euro 20 late this summer, the contact said. The impact of the price reductions has not been fully felt by US mills in dollar terms because of the strengthening Euro, the trader noted.

Packaging Corp. of America(PCA), the first company to report third quarter earnings, said that its box shipments for the period grew 7.8% both actual and per workday. Because of higher demand from its box plants, the company said it reduced outside domestic containerboard shipments by 12,000 tons and "lower priced" export shipments by 20,000 tons in the third quarter compared with a year ago. The company said its mills ran at 100% of capacity. The company is now taking a five-day maintenance outage at its Filer City, MI, medium mill, resulting in a 7,000 ton production loss. Excluding special charges, the company said it reported record earnings of $89 million compared with $53 million a year ago.

Atlantic Packaging Productssaid its startup of a converted newsprint machine in Whitby, ON, is "progressing well" and the machine is increasing daily output levels. The machine, which started up May 28, will be producing lighter and medium weight linerboard and medium grades, the company toldP&PW.Target capacity was originally set at 300,000 tons/yr making only linerboard. The paper is being sold "exclusively to partners and exclusive customers," the company said. A company official also said that the firm had "many interested existing and potential partners" for developing a US Midwest sheet feeder plant.Voith, which handled most of the conversion, toldCanadian Pulp & Paperthat the rebuild included modifying PM's the main dryer section, including steam and condensate systems, along with hood modifications. New tail threading equipment and UTM pulper were also included, along with relocating a calendar and reel. Rebuilding the mill's stock preparation line to take old corrugated containers rather than old newspapers also was completed.