By John Hall
On February 11, 2016, My Purchasing Center interviewed Karolina Tomczyk of IHS Pricing & Purchasing, for fresh information on the paper packaging market. To listen to the interview, Falling Energy Prices: An Update on the Paper Packaging Market, please download the podcast from the Media Center.
Buyers should expect modest price increases in key paper and packaging markets in the coming year, analysts tell My Purchasing Center this week.
This comes after several years of calm and low price volatility, predictable, single-digit hikes and a lengthy period of unusually low oil prices – a major driver of prices for finished goods, as well as many of the plastics and resins used in packaging.
Market researcher IBIS World says buyers should expect single-digit price increases through 2018, ranging from a low of 1.5% for coated papers to a high of 2.6% for flexible packaging. Forecasts are bolstered by such factors as a rapidly improving U.S. economy, robust construction activity and amped up global demand. As inventories draw down for paper, price increases could be more robust than usual, observers say.
In this report, My Purchasing Center explores the following key markets:
Pulp Fact: Print Continues Slow Decline
The price of virgin wood pulp is a dominant driving force in prices for coated paper, corrugated boxes and many types of packaging. Over the next three years, buyers can expect pulp prices to rise at an annual rate of 1.3% after three prior years of annual 5.6% growth rates, according to IBIS World. Much of the reason for the strong price rises from 2013-2015 came from rapid, historically high demand from emerging countries. Most of those increases were directly passed on to buyers of finished goods.
One of the more fascinating back stories in these markets is the way they’ve adjusted to a precipitous drop in printing newspapers, magazines and books as consumers move toward a digitized world, IHS Senior Economist, Pricing and Purchasing Service, Karolina Tomczyk tells My Purchasing Center. One sign: The ongoing repurposing of newsprint mills to other means, including paperboard and containerboard manufacturing. This alone has helped sustain paper prices.
The print versions of newspapers and periodicals continue evaporating, along with advertising revenues. According to Pew Research, print advertising revenue is now just 45% of what it was in 2006, and the sluggish growth in online ad revenue continues to stymie media executives. According to Statista.com, the number of daily newspapers published in the U.S. has been falling steadily – down over 1,600 dailies from 1985 to 2011.
The decline of printing and writing papers isn’t going to change, Tomczyk says. “The main is the media is moving to electronic devices.” She adds that overall printing and writing paper demand in the U.S. has declined by about 4% in 2014 and there will be a similar contraction in 2015. The most affected category is newsprint, which fell nearly 10% in volume in 2014 and another 10% this year.
According to IBIS World, advertising revenue among major printing, labeling and publishing companies constitutes one of the key drivers of demand for coated paper products, and it’s been falling steadily at about 1.3% a year. “This driver has declined in recent years as consumers have increasingly relied on digital outlets for news and entertainment,” the firm notes in a 2015 report. Lower demand from printers has limited the ability of some suppliers to increase prices. “Spending on print advertising is forecast to continue falling at an annualized rate of 1.2% during the three years to 2018, further stunting price growth and boosting buyer power somewhat,” it adds.
Tomczyk says IHS expects newspaper publishing to contract another 7.2% this year before becoming a shadow of its former self from as recent as 2007 (an almost 51% decline)
“Newspaper publishing is now half of what it was eight years ago,” she adds. “The main reason is the decline in advertising, which is driving the newspaper business.” Print magazine publishing is faring much better. Even book publishing is showing positive signs of renewal, with blockbuster orders for recent print versions of “Fifty Shades of Grey” and “Go Set a Watchman.” It’s doubtful that’s enough to restore the book printing business to its former glory, however.
“You can see spikes in these figures but these titles don’t come often enough,” she adds. “So the book publishing industry continues declining. We estimate it will decline around 4% in 2015 and price will be the main factor in print vs. digital.”
Another trend for buyers to watch is price differentials in virgin fiber and recycled content. Many observers say the gap is narrowing.
“Producers continue making a big push for developing methods for improving the sustainability of the materials they need, including reuse, recycling, so they can be used as much as possible in order to conserve natural resources,” Tomczyk adds.
One of the reasons food packaging prices never seem to drop significantly is producers are required to use virgin fiber (for health and safety reasons).
China, meanwhile, continues to dominate many of the world’s recycled paper markets, mainly because of the sheer number of packaging mills it operates. “They buy the recycled paper from Europe and North America, and every now and then, they will go into a buying cycle,” Tomczyk says. “The price of recycled paper will skyrocket and then all of the Chinese warehouses will fill up and the prices will go down. And then the Chinese quietly recycle the paper in their mills until they run out and then they go into buying cycles again.”
Recent Pricing and Supply Trends
Following is a brief look at current trends, as well as the factors driving pricing and buyer strategies, according to IBIS World:
Coated paper. The current “benchmark” price is near $1,378 per ton, and prices range narrowly from $1,100 to $1,600 per ton. Coated paper prices have grown at a 1% annualized growth rate since 2013. Coated paper demand is largely being fueled by higher consumer spending, as well as construction activity.
In spite of precipitous drops in commercial printing, overall rising demand for market products has allowed suppliers to increase prices without risking declines in demand. Prices are affected by the type of paper, finish volume of coating and size. Customization costs are low. Modest gains in uncoated paper prices, tempered by slackening wage costs because of automation, are the key price drivers. Robust competition, as well as low supplier switching costs, has continued helping keep prices relatively low. Discounts, meanwhile, are rare because supplier margins are fairly thin. Buyers generally go for bulk or long-term purchase contracts to keep costs down.
Paperboard and packaging papers. Buyers paid an average $625 per ton this year; prices ranged from $590 to $840 per ton. Unlike coated paper, paperboard and packaging papers have benefitted from robust price increases of about 2.7% a year since 2013. Population growth and industrial demand are helping (the the industrial production index, for example, has been growing by nearly 4% a year).
Prices depend on paper grades, as well as size, coating and quantity. “Virgin linerboard, also known as kraftliner, commands higher prices in the market due to its fiber purity,” IBIS World states in a 2015 report. Recycled linerboard, also known as testliner, and fluted containerboard that is used in corrugated box production, meanwhile, have lower average costs. Price driver volatility is higher than in other paper/packaging markets, chiefly because of energy costs, as well as fluctuating costs for wood pulp, chemicals and recycled paper. Buyers look for long-term contracts to mitigate price volatility.
“There’s pressure on producers to come up with lightweight packaging that still has the same attributes in terms of strength, durability, etc.,” IHS Senior Economist Tomczyk says. “This not only would lower raw material costs, but waste as well.” She adds that she and other observers were surprised the “consumer gasoline price dividend” from lower fuel prices didn’t ratchet up packaging demand, but still expects healthy gains in the coming year.
Corrugated boxes. Corrugated box pricing continues to rise because of the cost of paper and increasing demand. This year, average prices have hit $63.37 per pack of 25, according to IBIS World. Prices wildly fluctuate depending on the box size, wall strength, quality of materials and box customization. Price differentials among virgin fiber and other materials are minimal, even though some buyers seek boxes made of higher quality materials for their aesthetic appeal.
Paper costs are the biggest price driver for corrugated; paper prices for corrugated uses have risen at an annualized rate of 4% over the past three years. Of course, an improving economy and boosts in consumer spending correlate with greater demand, and thus, higher prices for boxes to ship and transport goods. Price volatility in recent years has forced buyers to seek long-term contracts.
Molded fiber packaging. Prices have risen at an annualized rate of 2.2% for the past three years. The average price of molded fiber packaging is $67.57 per 250 packages, although prices vary widely depending on quality of the materials, size, customization and coating, according to IBIS World. Unlike corrugated boxes, higher quality materials used in molded fiber packaging, such as special plastics or wax coatings, can easily command higher prices. Food and produce are among the biggest uses for molded fiber packaging. Because this type of packaging is highly sustainable for its recycled content and recyclability, demand has led to higher prices. However, healthy supplier competition and widely available substitutes such as polystyrene have mitigated price volatility.
Flexible packaging. The average price was $142.87 per 1,000 packages in 2015. Buyers have seen very minimal price volatility, with rate hikes of 1% annually. Food and industrial production are among the most popular uses for this type of packaging. Prices are most influenced by size, thickness, sealant and customization. Plastic and resin prices, which have been falling about 1.8% per year over the past three years, heavily drive flexible packaging prices because they are a major component.
Paper, Corrugated Packaging Price Forecast 2016
Buyers can expect stable prices for coated paper for the remainder of the year. “We think price increases for coated papers have ended and there are basically no market fundamentals for prices to continue rising this year,” Tomczyk says. “Of course, there is another factor. The U.S. dollar is very strong at the moment and it will attract imports from outside of North America. That means even if there is a tightening of supply, it will basically be met with a rise in imports and an evening out.”
IBIS World projects the price of coated paper will continue growing at an average annual rate of 1.5%, fueled heavily by surging demand in Asia, as well as rising consumer spending and industrial production of 3% and 4% per year, respectively, through 2018. Buyers should anticipate low price volatility over that time.
The price of paperboard is expected to increase at an annualized rate of 2% through 2018, according to IBIS World. Fueling increases will be electricity rate increases (2.2% annualized), and the anticipated rise in wood pulp, and paper prices.
Over the same period, buyers should expect average prices for corrugated boxes to rise 2.5% per year because of rising demand from key buyers like food distributors and grocers, and increasing input costs such as paper prices, according to IBIS World. Price volatility, however, is expected to remain low.
IBIS World project prices for molded fiber packaging to continue growing at a faster annualized rate of 2.6%, for many of the same reasons as corrugated boxes. Margins among most suppliers are already very thin, so they likely will pass on any sudden input cost increases to buyers.
Finally, expect prices for flexible packaging to rise about 2.2% annually through 2018. With substitutes limited and price volatility higher than usual because of oil’s impact on plastics and resins, buyers may be forced to seek long-term contracts to provide more predictable costs.
John Hall is a freelance writer who reports on commodities markets and procurement and supply management topics for My Purchasing Center. His website is jhallmedia.com.
George E. Krauter
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