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Board Increase Succeeds, No Ifs, Ands or Buts
August 9, 2008 By: Mark Arzoumanian Official Board MarketsIt’s a slam dunk. This month, integrated containerboard producers successfully implemented a $55 per ton price increase. It was clean, quick and met with very little resistance by independent box makers. Adjustments have been made in the price chart found on the bottom of this page.
Independents surveyed by phone last week all agreed that this increase went through for one reason only: rising costs. Yes, supply and demand was a factor but only because of three board mill setbacks over the past four months. First you had the International Paper (IP) Vicksburg, Miss., kraft linerboard mill’s tragic boiler explosion on May 3. One person died. The mill is still down. Then this past spring you had the Weyerhaeuser (now IP) containerboard mill in Cedar Rapids, Iowa, shut down due to area flooding. It’s struggling to get back up to full speed. Finally, on July 29 Packaging Corp. of America’s (PCA) Tomahawk, Wis., semichemical medium mill had a fiber storage tank explode, killing three workers.
The amount of the increase ($55) is unprecedented. Often when containerboard price increases are announced by the integrateds, independents have successfully whittled down the amount by $5 ton or $10 a ton. Not this time: No push back allowed.
Cost inflation (for fuel, freight, starch, inks, chemicals) has hit the paperboard packaging industry hard. This latest increase clearly shows how determined the major integrated containerboard producers are to restore margins. They’re feeling the pressure and know that if they don’t follow up this linerboard and medium increase with a box price increase, discounting could start cropping up before the end of this year.
Are Your Box Prices Up?--
“People will have to lose business to get box prices up,” states a containerboard broker on the East Coast. “There’s a lot of pressure on the integrateds right now. They have volume accounts that can’t go up for a period of time.” He adds that independent box makers want containerboard prices to go up because they know they can’t get a box price increase unless containerboard prices go up. As usual, they’re looking to the integrateds for box price increase support.
Independents surveyed didn’t complain about having to pay more for their raw materials. Instead they were glad to see that a number of the integrateds (including IP and PCA) weren’t wasting any time in telling box buyers that their corrugated packaging would be rising anywhere from 10 percent to 13 percent, effective either some time this month or early next. And they’re standing firm. Sheet suppliers are telling customers their product will go up anywhere from 12 percent to 14 percent.
According to a survey by Joshua Zaret, New York City-based Longbow Research paper industry analyst, 95 percent of corrugated container producers have announced price increases ranging from 7 percent to 11 percent.
“Seventy-six percent of container producers felt the amount of their box price increase would not fully offset higher costs,” he says. “Several respondents felt that an additional price increase in 2008 is a possibility.” He adds that almost 90 percent of those surveyed reported same-to-tighter containerboard supply compared to the prior month. Many attributed the change to unplanned temporary outages at mills and supply side management (matching production to orders). Others suggested pre-price-hike buying.”
Keeping Box Makers in Business--
“[Box buying] customers recognize that they will drive box converters out of business if they don’t pay the increase,” says the aforementioned East Coast containerboard broker. “They’ve budgeted a price increase [for this year] and understand that prices are going up.”
“Our customer base has been severely bruised by double-digit increases from the plastics industry, so they are fairly well educated [on recent price increase activity],” notes a sheet plant executive in the MidAtlantic.
“All of our discussions [with customers] have centered on escalating costs and putting people in the mindset of already having seen other increases, like freight and fuel, being implemented,” states an independent box making executive in the Northeast.
His company told one of its customers that boxes will go up by 12 percent, effective on Aug. 4, but from a practical point of view the effective date would be Aug. 20. Instead of protesting or threatening to bid out the business, the customer asked, “If I gave you 11 percent on Aug. 25 will that be acceptable?”
“They recognize that they can shave a percentage point [off the increase] or push it back a couple of days, but the increase is coming,” he says.
Some independent box makers have made deals with their customers and now find themselves in the tricky position of having to go back to these clients and negotiate the deals again because they need more money. A single digit increase isn’t enough. Box makers in this position say it’s all about knowing what they need to stay in business and make a buck. In a cost–driven environment, they have to at least recoup those costs.
And how has business been for independent box makers recently? Not bad. Of course, some of that can be attributed to customers putting in their box orders in anticipation of rising prices. These customers know the increase is firm.
“Business has been strong, but not crazy strong,” says an independent box maker in New England. “It’s steady. July slowed down but we’re pretty busy now.”
“Business is actually slightly ahead of last year,” states the executive of an independent sheet feeder in the East Central. “A big portion of this is us picking up business closer to home. We will pursue people we might not have had a relationship with before if they’re close to us because we know what they’re experiencing.”
More to Come? --
With this increase sliding right through, you might think that’s it for 2008. But the latest scuttlebutt is that the integrated board producers (IP is mentioned most often) might push for another price increase this fall. Look at the second quarter earnings reports that have come out over the past few weeks and you see a lot of paperboard packaging companies losing millions and millions of dollars. This current increase helps them recoup inflation costs. If they push for another one, they’re saying, “It’s finally time to make a profit.”
