Linerboard price increases bump down the supply chain
By Kathryn Belyea -- Purchasing, 3/23/2000
Recent supplier price increases on linerboard ($50/ton) and corrugating medium ($60/ton) are succeeding only gradually as box plants push through increases to protect their margins. Buyer reaction is mixed at best, with many fighting hard to mitigate the effects of a third increase in twelve months.Upward price pressure for containerboard is supported by "pretty good" demand according to Robert Hogue, senior economist at the Bank of Montreal. Demand, he says, is being boosted by an U.S. economy that continues to show strength after a robust final quarter in 1999.
Leadtimes for liner and medium are relatively stable, but the market continues to tighten as exports are rising and domestic demand is rebounding after a temporary downturn in January (when corrugated producers drew down their inventories). Further tightening is expected over the next few months as market reports say producers will take more than 200,000 tons of capacity off line for maintenance or other reasons through the end of April.
Jim Davis, vice president of sales, at the Deline Box Company in Denver, and president of the Association of Independent Corrugated Converters (aicc), says his containerboard costs went up 12% in February but suggests the market is "slower than reported." In fact, he says leadtimes are shrinking in the West as business slows heading into March and April.
Davis links price hikes to the fact that paper stock prices have slipped by as much as one-third during the last 60 days. "People are more into glamour stocks, like Motorola, which went up 13 points in one day," he says. "Producers think price increases and cutting production will stabilize the industry, but this is not necessarily a healthy way to control the marketplace. Integrated companies need to get leaner and meaner in their operations."
One market analyst points out that slipping stock prices have been sounding alarms for containerboard producers for some time. "The key is what the [containerboard] industry has been doing on the supplier side to generate better financial returns," he says. "Producers have to manage their businesses differently. Would you want your IRA invested in stock that's gone down 40%-50% since 1994?"
Steve Young, AICC'S executive vice president believes the containerboard price increases will eventually stick, noting that containerboard rose above $500/ton back in 1994-1995. "Since that time," he says, "prices came down dramatically. Now the pendulum is swinging back the other way and increases are coming off lower price levels compared to 1994-1995." Still, Young hastens to add, "In any buyer-seller relationship the buyer is going to resist price increases, so independent converters are going to resist as much as they can or their contracts will specify terms that grant grace periods. This is all subject to negotiation."
Young voices concern over what price increases will do to market share of corrugated over the long term. "If buyers are facing volatility in packaging costs and can't predict budgets accurately or plan purchases, this will create an incentive to look for other suppliers or other forms of packaging."
Buyers resist
Feedback from end use buyers suggests that Young's fears may be well founded. A purchasing manager for a Wisconsin-based food processing company says, "There's much talk of a price increase, but we're vehemently opposed and have expressed this to suppliers."
In California, a senior buyer has asked his box supplier to come up with three or four strategies to handle the proposed increases and is willing to look at forward buying on some items. At the same time, he points out that July projections don't account for increased costs in February. "We may have to tell them," he says, "that we'll be packaging heavily for back-to-school in July, and they won't participate in that business if they hit us with a price increase early in the year." This buyer notes that his display suppliers, with typically looser margins, have not announced increases so far.
A purchasing manager for a New York plastics company says he received notice in February of a 10% increase effective on the first of March. "This forces us to look at other packaging methods," he says. "We need to look at how to buy less or how to change the packaging so we don't need an outside master carton. We'll look at shrink band, shrink wrap or other options to offset the increases."
More accepting is a Massachusetts-based purchasing manager who says his company, a manufacturer of vinyl pouches, will absorb a 5% increase. "We're not raising prices because of corrugated," he explains, our products are more closely related to the oil industry. We have plenty of product that goes into boxes, but we're not at the point yet of resisting increases."
Focus on total costs
Whether or not buyers succeed in rolling back the rising price tide, Davis sees plenty of opportunities for packaging buyers to manage costs more effectively.
For example, he suggests that end users can reduce costs by cutting back on "run-and-ship" and consolidating more. "Too many companies yield to the pressure of getting things out the door in order to meet quotas," he says. Instead of taking shortcuts on the brown-box side, ordering different boxes for different products for the sake of convenience, Davis says savvy cost managers will look for container sizes that suit multiple products, allowing them to buy in larger quantities.
Microflutes, he notes, are an alternative for saving space. "Some products are over-packaged," Davis ob-serves. "A smaller flute may well do the trick. Go to McDonald's and order a Big Mac. You'll see that the flute is very thin. It's hard to tell it's corrugated. Pizza boxes, too, are more likely to have e-flutes. The reason is they take less space in the pizza parlor." While companies try hard to make the numbers look good, they often neglect to analyze their packaging needs, Davis says.
By looking at flutes, reassessing packaging size options and buying larger quantities for multiple products Davis says buyers can take costs out of the system.
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