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Board Price Increase Attempt? DOA
October 18, 2008 By: Mark Arzoumanian Official Board MarketsA dismal box business climate has put a knife right through the heart of the latest attempt by integrated containerboard producers to get a $60 per ton price increase implemented this month.
Yes, International Paper (IP), which led the way on this latest effort, has indefinitely shut its 430,000 tons per year (tpy) linerboard machine at Valliant, Okla., idled its 250,000 tpy linerboard machine in Albany, Ore., and has yet to restart its containerboard mill in Vicksburg, Miss. (see sidebar). In addition, once IP decided to go for another price increase this year (OBM reflected a $55 per ton containerboard price increase in its Aug. 9th issue), its integrated peers quickly followed with their own announcements. So there was unity. But in the last six weeks the world economy has changed for the worst. Uncertainty dominates. These production reductions simply aren’t enough to make a difference when it comes to raising prices. Put another way, the timing couldn’t have been worse for this fall price increase attempt.
“This increase [attempt] is pretty much dead in the water,” says an executive with an independent box maker on the East Coast. “IP occasionally talks about it, but there is nothing going on. Prices haven’t moved, it doesn’t seem like they’re going to, and there is just nothing going on whatsoever at this time to suggest that this increase is going to be viable.”
“IP jumped the shark,” states an independent box maker in the Midwest. “Their timing [on the price increase attempt] was really bad.”
Many Reasons--
Why wasn’t this increase able to succeed? First, you have a slumping box business. Last week the Fibre Box Association reported that September shipments of corrugated products fell 11.3 percent on an average week basis when compared to September 2007 numbers (see chart on this page). September is usually a robust production month, as plants crank out boxes for the upcoming holiday season. The year to date shipment numbers aren’t as bad as September’s, but they’re still negative: down 2.6 percent.
Second, in the past couple of weeks the U.S. dollar is strengthening. This is due in part to the global credit crisis. The dollar has taken a beating in recent years, allowing U.S. containerboard producers to export their goods overseas and stabilizing domestic prices. But in the current climate of economic panic and uncertainty throughout the world, the U.S. dollar still represents a safe haven.
Third, you have plummeting recovered paper prices (see additional commentary on page 11). Specifically, prices for old corrugated containers (OCC) are now hitting about $60 per ton in many regions of the U.S., versus $110 per ton just a couple of months ago. The main factor behind this is rising containerboard inventories at China’s two main producers: Nine Dragons and Lee and Man. If these two companies can’t sell their finished products, why in the world would they need to buy OCC (and old newsprint)? U.S. integrated board producers often cite the rising cost of recovered paper as a key reason for the need to raise prices. Saying that now looks foolish.
“The outlook is bleak, with major mills [in China] putting purchasing on hold,” says an executive who purchases recovered paper for one of the major board producers in China. “Many smaller mills are either closed or unable to buy due to financial difficulties.”
Fourth is softening fuel prices. Sure, they might increase again. But for now they have dropped noticeably. Any company saying it needs more money for its products because of escalating energy costs looks out of touch with today’s volatile economic climate.
Can’t Ignore Fear Factor--
Fifth is fear. It has definitely set in among market participants. Box buyers are very concerned about what the future holds for their products. They are letting their inventories run down. They just don’t know what to expect and so they’re sitting on their hands, playing the wait and see game.
Recession is yet another roadblock to increasing prices. The government numbers might not yet be out to back up using the “R word,” but this country is in a recession. Last week retailers reported the biggest drop in sales in three years (down 1.2 percent). Americans are spending less. Manufacturing is slowing around the country. The nation’s economic anxiety continues to build.
What containerboard producers have to worry about now is discounting. In recent years board prices have been very stable, thanks to a robust export market and the willingness of companies like IP and Smurfit-Stone Container Corp. to exercise market discipline by shutting down (either permanently or temporarily) capacity. But in this current world economic climate, how long will they be able to prevent board prices from tumbling?
“We believe price levels will hold, as inventories remain taut and there will be at least 530,000 tons of newly idled capacity in October and November,” says Joshua Zaret, paper industry analyst for Longbow Research, New York City.
“With key input costs like OCC and energy falling, current price levels should yield healthy margins at many mills, especially recycled board mills,” states Mark Wilde, paper industry analyst for Deutsche Bank, New York City. “The economy is slowing and the U.S. dollar is rising. Price stability over the next six to 12 months would be a huge win for producers.”
As Zaret readily admits, weak box demand, falling OCC prices, and a stronger U.S. dollar means containerboard producers are facing one of their biggest challenges in years.OBM
