'Supply side' price increase sticks for linerboard, medium
By Tom Stundza -- Purchasing, 5/20/1999
Despite weak demand, containerboard prices have moved up 15% this spring as extensive downtime at six mills has taken two million tons of annual capacity out of production. As a result, boxmakers have been able to boost sales tags 12% for corrugated containers.Still, it took producers two attempts to implement their February increases on kraft linerboard ($50/ton) and corrugating medium ($60/ton). That month, market prices moved up $35/ton on kraft liner and $45/ton on semichemical medium; the remaining $15/ton increases were implemented in March. Box buyers also say that it took some time for subsequent corrugated price hikes to gain acceptance.
Nonetheless, mill execs already are talking about additional price hikes for liner and corrugating medium in coming weeks. One market analyst says this is "a textbook example of supply-side manipulation of pricing in the face of poor demand." Indeed, the entire U.S. folding carton and paperboard packaging market remained weak in first-quarter 1999, and industry sources say no recovery appears imminent.
Linerboard sales have been stifled by end-user unwillingness to increase stockpiles. Preliminary January-March statistical data shows a 5% decline for production and shipments of all containerboard grades, with a 2% decline in kraft liner and corrugating medium for domestic use. Total paperboard production fell 1.2% in 1998 to 49.77 million tons. Output in first-quarter 1999 ran at an annual rate of just 48.54 million tons. Still, producers say they want at least one more increase this year.
Smurfit-Stone Container CEO Ray M. Curran insists the industry needs higher containerboard prices, "to provide some sort of adequate return for investors." He and other kraft liner makers insist that $450/ton for linerboard is the target price level. However, 42-lb kraft linerboard has not sold at that level since first-quarter 1996.
There are some market observers who believe market demand will recover strongly enough to support higher prices as the weather warms. William Copeland, president of Copeland Economics Group, sees both U.S. and world liner and corrugating medium markets improving this year. He believes that boxmakers will begin to replenish containerboard inventories to support a second-half demand recovery in North American and offshore markets.
On one hand, Copeland remarks that domestic containerboard producers are doing a better job of managing market supply. "Permanent closures of older, high-cost mills and periodic paper machine shutdowns have balanced supply with actual demand and eliminated surplus inventories." On the other hand, he says new opportunities are emerging for such value-added corrugated packaging materials as microflute, preprint, and laminated boards. And growth of promotional packaging--using the box to sell the product--is creating opportunities for white top and mottled-white premium grades. "These products are pulling the industry beyond the traditional transport container of the simple, plain brown box," Copeland says.
Copeland projects that U.S. linerboard exports will grow 5%-6% this year after falling about 700,000 tons in 1998 to 1.28 million. Reason: Key export markets in Asia are now obtaining critical financial support from international bankers and lending agencies, and this should fuel demand for packaging materials. Still, some Wall Street analysts remain concerned about prospects in Asia, Eastern Europe, and S. America. They say persistent weakness in these regions could boost imports to a level far exceeding the 17 million tons imported last year. In first-quarter 1999, paperboard imports ran at an annual rate of 17.5 million tons while exports slipped to a rate of 1.25 million tons.
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