By John Hall
The past year was a welcome one for buyers of containerboard and corrugated packaging as prices returned to relative calm and inventories were flush.
Expect much the same in the coming year, according to analysts, as economic conditions continue to improve and manufacturers tap into growing demand in the food, beverage and automobile parts sectors.
Cardboard or containerboard, whose major components are linerboard and corrugated medium, is the world’s most popular packaging material. According to IBIS World, the primary products include boxes, fiber cans, tubes and drums, folding cartons, non-folding sanitary food containers, and rigid-sided boxes.
Period of Calm After Turbulent Price Hikes
Looking over the past year, the containerboard industry was a far less volatile place for buyers than it was in 2013. That was the year procurement professionals grappled with the fallout of cumulative price increases of 11% – a $50 per ton hike in late fall 2012 and a similar hike the following spring. The price increases perplexed analysts like Tom Runiewicz, Principal, Industry Practices Group, IHS, because demand and capacity had been relatively flat. But in an industry where 70% of the production is controlled by just five companies, it was inevitable. (A leading market research firm has predicted that the number of domestic producers will continue dropping through 2018 at an annual rate of about 0.6%.)
In 2014, meanwhile, no such sweeping price hikes occurred.
Part of that stems from swelling inventories throughout much of the year, Runiewicz tells My Purchasing Center. Capacity has surged in part because of several converted newsprint mills going online this year to produce linerboard, as well as mill openings in upstate New York and Ontario, he says.
High capacity may be one reason why paperboard container production nearly hit its lowest level in 31 years, according to the NPTA Alliance (formerly the National Paper Trade Association). Inventories and shipments accelerated significantly in 2014, the group notes in its 2014 report. In its 54th annual survey, meanwhile, the American Forest & Paper Association notes that containerboard capacity has rebounded quite well since the recession following huge production percentage increases.
It’s no surprise that offshoring of North American manufacturing industries has hurt the corrugated packaging business, but a lot of slack has been picked up in areas such as food and beverage packaging, and thanks to the resurgence of the automobile industry, its parts supply chain.
It is still a profitable industry; average margins are expected to rise from a 4.1% gain this year to nearly 5% by 2018, according to IBIS World in its 2014 report on corrugated packaging. And thanks to a wave of automation retrofits in domestic plants, labor costs have been going down; wages were down over 12% in 2014 alone.
In general, containerboard pricing remained calm throughout most of 2014, posting gains at an average annual rate of a little more than 3%, according to IBIS World. Of course, there were exceptions, particularly in specialty markets like recycled board. According to Expense Reduction Analysts, for example, Rock-Tenn and two other large suppliers raised prices by $50 per ton for uncoated recycled paperboard; soon after, Rock-Tenn announced 10% and 12% prices increases for its corrugated box and sheets, respectively.
IBIS World’s benchmark price per 25 boxes was $66 at the beginning of 2014, but prices have fluctuated wildly – from $13 to $300 depending on the size, wall strength, quality of materials and customization.
The biggest driver of corrugated prices is paper, prices of which have been somewhat volatile yet climbing annually at about a 0.4% clip, according to IBIS World. Other drivers sending prices north include surges in industrial/residential construction and consumer spending, which has been rising about 2.2% annually since 2011.
A Look at the Year Ahead
As My Purchasing Center has reported, global paper markets in general are expected to continue slow and stable growth through 2017. Analysts see the North American packaging industry growing to a $186 billion market by 2017, bolstered by “impressive” demand surges from Mexico, strong rebounds in the paperboard segments (most notably corrugated packaging) and the growth in so-called “retail-ready packaging,” according to Smithers PIRA.
Buyers can expect moderate price increases of about 2.3% per year at least through 2017, closely paralleling similar paper price hikes, according to IBIS World. As previously stated, steady increases in consumer spending are fueling demand for packaging, as are rising levels of industrial and residential construction activity and mining, IBIS World reports.
On a related note, paperboard price hikes aren’t expected to trail off in the immediate future, according to Expense Reduction Analysts. Fueling those expected increases are an anticipated severe and unusually harsh winter ahead, as well as possible hikes in raw material costs.
Runiewicz anticipates that linerboard pricing will remain relatively calm in the coming year.
“From a buying perspective, there’s plenty of capacity if indeed the new capacity that’s come online meets your quality specs and the prices have been relatively flat,” Runiewicz says. “In fact, I expect prices to be flat through the remainder of this year and into 2015 because of this new additional capacity we’ve seen. And demand hasn’t grown much.
“We’ve seen a little spike in demand, but it hasn’t really grown with the increases in manufacturing we’ve seen,” he says. “One of the main reasons is a lot of the demand is coming from foods, pharma and other areas where you’re not seeing a tremendous amount of growth and never really have. A lot has been tied to slow economic growth. Food is fairly stable but you don’t see these big swings in processed food production.”
Meanwhile, Runiewicz cautions buyers to ensure new generations of recycled linerboard meets their required specifications. The material is typically used for packaging types of products like food, tobacco and pharmaceuticals, and not heavy items like appliances. “It’s a different type of linerboard, called light linerboard,” he says. “It’s not the usual heavy stuff we’ve seen, but I’ve heard the quality is quite good. It has lots of applications, but it tends to not be as strong as linerboard made from virgin material.”
Advice for Buyers
Meanwhile, a sagging Paper & Products Production Index prompted the NPTA Alliance to urge suppliers to stay competitive on price. That said, buyers can expect “fairly positive” negotiating conditions in the coming year, according to IBIS World.
Much of that is because of the low production switching costs and relatively simple, or “low level” of specialization in the corrugated manufacturing sector, the firm notes in its 2014 report. This allows procurement folks to switch suppliers with relative ease without risking quality or distribution issues like minor adjustments to box sizes.
The only factor that can send negotiations into a tizzy would be switching to other mediums like plastic containers or solid fiber boxes, which can be significantly different in terms of durability and cost, according to IBIS World.
“Buyers should engage in contracts when possible to keep prices low and to leverage the full value of the contract to receive significant per-unit discounts,” the firm advises in its 2014 report on corrugated packaging. “With prices increasing overall, buyers should engage in contracts to lock in lower prices now and keep costs down, or risk a significant shift in price that may drastically raise costs. Buyers should also seek discounts based upon volume to reduce prices further.”
Also see the My Purchasing Center article, U.S. Economy Growth Engine, Buyer's Market Continues
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.
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