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Census Report 2004: Box Industry Springs Back
July 1, 2004 By: Jackie Schultz Paperboard PackagingAfter several years of sluggish growth, converters are beginning to see a rebound in business.
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In what can only be interpreted as some well-deserved good news, Paperboard Packaging's annual Census Report reveals an industry on the mend after several years of blighted economic conditions.
A year ago, 90 percent of the corrugated container managers and 80 percent of folding carton and rigid box converters interviewed for the Census Report described business conditions as stagnant or depressed. This year's outlook is much brighter. In fact, 32 percent of corrugated converters and 33 percent of folding carton converters say the industry is healthy.
While 30 percentages points aren't exactly overwhelming statistics, this is a welcome change from previous years of stagnant growth and sagging sales. Converters operating in the United States say the economy is finally starting to recover, and they're readying their plants with improvements and capital machinery investments.
"Business has and continues to pick up throughout the last nine months. However, consumer spending is the key," says a manager from a corrugated container plant.
A folding carton converter comments that his business was up 27 percent in 2003 and he anticipates this year and next to be up 20 to 40 percent.
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This confidence is bolstered by the latest statistics from industry associations.
April U.S. box shipments on a per day basis reached their highest monthly total in more than three years, according to the Fibre Box Association. May year to date shipments increased 3.2 percent over May 2003, from 155,909 billion square feet in 2003 to 160,931 billion square feet this year.
For 14 months, the year over year growth in U.S. folding carton shipments remained positive, according to the Paperboard Packaging Council. This is the longest run of positive growth since shipments began to show weakness in June 2001. March 2004 saw a 4.6 percent growth in shipments, when measured in dollars, and 3.6 percent growth in tonnage.
For converters, this good news transcends into more new products and services. For machinery suppliers, it means a turnaround in equipment sales.
The Spending Game
Corrugated and folding carton converters are playing the game of capacity poker - stacking the deck, making improvements and investments, and preparing for the recovery.This year, many converters are in the spending mode with more than 40 percent planning to increase spending for equipment. Last year only 25 percent of corrugated converters and 30 percent of folding carton converters increased their capital equipment budgets.
Forty-three percent of the corrugated plants and 42 percent of the carton plants plan to keep spending at last year's level and just under 20 percent of both groups plan to cut back. When buying equipment, most board converters are purchasing new versus used.
For a quarter of the converters, this new equipment is helping them diversify their businesses. Some companies are pursuing high-end graphics and digital printing while others are focusing on same day turnaround of product.
"We're entering markets that are recession resistant by manufacturing specialty products where competition is limited and price is not as much of a factor," says a folding carton plant manager.
The spending upswing also holds true for production. About 40 percent of the converters surveyed are increasing spending on production other than equipment, while 45 percent of the corrugated plants and 53 percent of the carton plants plan to hold at last year's level.
Fourteen percent of the corrugated plants and 6 percent of the carton plants are planning cutbacks, which in most cases translates into layoffs.
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Most of the converters responding to the Census survey say they purchased more equipment to serve existing markets. The majority of equipment added in the past year was for printing and high-end graphics.
A corrugated converter says his company recently purchased a specialty folder-gluer to offer customers designs that his competition can't.
Litho/offset continues to be the printing method of choice for 85 percent of the folding carton converters represented in the survey.
Flexographic printing is used by 37 percent of the respondents, and 19 percent offer gravure, letterpress, silk screen and hot stamping.
The questionnaire asked respondents to indicate which manufacturers supplied the machinery. Based on their answers, Paperboard Packaging was able to break down what part of the world the machines were built. More than half of the corrugated converting machinery was made in the United States. About 30 percent came from Europe and 9 percent was delivered from Asia. The numbers shift for folding carton converters who purchased most of their machinery (53 percent) from European suppliers. The United States came in second at 37 percent.
Restructuring for A Recovery
Both corrugated and folding carton converters took advantage of the slow business climate in recent years by restructuring their facilities, and concentrating on lean manufacturing, process improvement, waste reduction, cost cutting, and effective purchasing. A quarter of the corrugated container respondents say their companies created new and more aggressive sales strategies in an effort to establish new markets.Some companies entered non-traditional markets, fine-tuned their customer service departments, and diversified their product offerings while others reduced their labor force and focused on quality programs such as ISO and Six Sigma.
"We ensure our customer service remains at the highest quality possible to ensure that customers don't look elsewhere," says a corrugated container plant manager. "Also, we've increased shifts to run the plant 24 hours a day to meet customer demand."
To offset eroding profit margins, 82 percent of folding carton manufacturers invested in new markets, and 27 percent bought equipment to serve these markets. These converters are investing in industries that show the promise of greatest growth. This includes the food and beverage and cosmetics and pharmaceuticals industries.
Sixteen percent of carton converters are using customer service improvements as an investment strategy and 15 percent are investing in what they do best - making cartons. Several are even entering new niche markets.
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"We are entering the plastic converting market and have purchased new equipment. We have an ongoing cost reduction program, and we're looking to revamp sales and marketing strategies and will add sales personnel," a carton converter says.
One question on the Census survey asked converters if their plants were offering any unique products or services. The responses varied from quick quotation response, package design assistance and better printing techniques to fulfillment services and paying closer attention to order quantities, minimizing setup costs and reducing inventory.
"From my knowledge most companies do not understand their costing and seldom post cost," a corrugated plant manager says. "We have focused on improving our actual estimating system and post costing every job."
A folding carton converter says, "We are currently entering the rigid window market and looking to gain a footing into new markets such as liquor, personal care, cosmetic, and others."
The Fight for Market Share
Both corrugated box and folding carton manufacturers share a mutual concern for collecting accounts receivable. A second tier concern is customers moving their manufacturing facilities overseas.Global overcapacity and increasing raw material prices are two additional worries for converters.
A subject that continued to crop up for corrugated converters was the fight for market share, especially between independent and integrated companies.
All of the major U.S. integrated companies increased linerboard and medium prices this winter, and another round of containerboard price increases were scheduled to take effect last month.
Independent plants accuse integrated companies of squeezing them because the integrateds are not raising their box prices.
"Integrateds need to stop thrashing up the market," says a California independent converter. This converter says integrated companies are raising their paper prices but cutting their box prices.
"The integrateds must learn how to run for profit," another converter says. "They need to close more facilities and stop selling marginal accounts."
The winner in this battle over business is ultimately the customer who has gotten used to dictating his box prices.
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"Our customers want their product cheaper than we can manufacture and our competition is tough," a folding carton converter says. "When will the price cutting stop? There is no way this can keep up."
Converters were asked what would have to happen in order for business to pick up. Almost three quarters of corrugated plant respondents and 36 percent of the folding carton manufacturers say the economy and consumer confidence have to improve. Half of the corrugated container plants and a quarter of the carton converters believe that overcapacity is a problem.
"The box industry in our area will have to thin out," says a southern California corrugated converter. "There is just too much competition - integrateds and independents."
"Because we are in California we have many problems with high costs, workman's comp, utilities, medical," a folding carton converter says. "Many companies have left the state for the Midwest or overseas. These costs need to be reduced."
Several converters called for government intervention to stop businesses from moving overseas and lower gasoline prices.
"From a macro standpoint, gasoline prices dropping could instill some confidence in skittish U.S. consumers, which would start the ball rolling," says a Midwest sheet plant manager.
Companies, especially those in the United States, want to see more domestic manufacturing, and they want the government to impose tariffs on imports. Many converters call for "a level playing field" with Asia.
The 2002-2003 manufacturing recovery has been the slowest on record, according to the National Association of Manufacturers. During this time, more than two million jobs in the United States have been lost.
Manufacturing has endured many changes in the past 10 years and board converters are caught in the current of this major market shift. One corrugated converter doesn't think manufacturing in the United States will ever return to its heyday.
"I don't believe that manufacturing will return to its previous levels," he says, adding that the industry needs to do a better job of reducing capacity and converters will have to re-invent their companies in order to survive in this new business era.
"The corrugated industry is a mature industry," adds a Texas sheet plant manager. "There is no magic dust to increase profit margins. You have to get to the basics - control waste, improve efficiencies, decrease setup times, do one box setups and retain employees."PBP
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