This article courtesy of My Purchasing Center.
Despite paper-thin demand from downstream customers still struggling in a sluggish economic recovery, corrugated cardboard producers have been successful at raising prices twice over the past 12 months and are even mulling additional hikes in 2014. It is an industry whose constriction is almost palpable and whose future continues to be threatened by an ever-declining manufacturing base.
Corrugated’s Biggest Buyer
Cardboard, 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.
The major sectors served by the U.S. industry includes manufacturing, agriculture, wholesale, shipping, and retail. Agriculture and food industries are among corrugated packaging’s biggest customers because of the need to store and transport produce and other perishables safely and economically. Cardboard boxes comprise the majority of corrugated packaging production (65 percent), followed by cartons, customized containers, and food and beverage items.
In 2013, the domestic industry recorded profits of $2.5 billion from $57.5 billion in revenues, according to IBIS World’s most recent industry report. The industry was hit with a sluggish 0.6 percent growth over the five previous years, but it is expected to improve slightly to 1.6 percent growth through 2018. An estimated 2.8 percent of domestic demand is met by imports, a much lower proportion than is experienced by similar U.S. paper converting industries, according to the report.
Demand at Snail’s Pace
Very little domestically produced cardboard is exported; unfortunately, the export of American jobs overseas has only made things worse. Analysts have been tracking the regression of cardboard for decades, but the Great Recession only accelerated the trend by placing an even sharper focus on the sagging production of goods cardboard is used to transport. Revenues plummeted over 9 percent in 2009 alone. Only the food industry significantly bolstered the cardboard markets during the few years following the Wall Street collapse.
IBIS World calls it “an industry in decline” in its September 2013 report subtitled, Boxed In: Despite Rises in Demand, Consolidation and Lack of Innovation Point to Decline. Key indicators: Slow revenue growth, a declining supplier base, and a dearth in product enhancements (technological changes have been targeted more toward production efficiencies and less toward product features). Its decline mirrors the life cycles of many of the domestic manufacturing sectors it serves.
“Domestic demand for industry products is highly correlated with manufacturing activity in the country, as well as the demand for retail products and food services. The United States is facing a slow decline in manufacturing activity, as U.S. companies increasingly shift operations offshore or import products,” the firm notes in the report. As a result, demand for packaging has ground to a snail’s pace. Even the country’s anemic GDP growth of 2.1 percent dwarfs the industry’s value added, which is projected to grow 0.7 percent a year through 2018.
“The quantity of cardboard box shipments in the United States is generally highly correlated with U.S. production of non-durable goods,” Stephen Hoopes, IBIS World industry analyst, tells My Purchasing Center. In 2013, the industrial production of non-durable goods is anticipated to remain relatively unchanged, with a slight decline of 0.3 percent expected in August,” adds Hoopes, calling on data supplied by the Fibre Box Association and the Federal Reserve.
Cardboard also is facing domestic competition from alternative products such as plastics, which packaging producers have been able to make more efficiently as well as more durable.
Market Analysis Puzzling
With demand unspectacular, it’s surprising that major suppliers successfully pushed two price increases in 2012. “I’m a little perplexed about some forecasts and assessments of the markets right now,” Tom Runiewicz, principal/economist for U.S. industry, pricing, and purchasing at IHS, tells My Purchasing Center.
Runiewicz says demand in the linerboard segment has been fairly flat throughout most of 2013 and is about even to what it was the year before. Moreover, capacity has also stalled. What really has Runiewicz scratching his head is the uptick in production of light linerboard from three U.S. mills, two of which were converted from their prior roles as newsprint plants. Light linerboard isn’t suitable for boxes used to transport big things like refrigerators and washing machines, he says.
Industry consolidation has also been profound. Of the more than 1,200 companies in the U.S. market, only a handful are commonly referred to as integrators that operate a grand, global scale, while most of the industry is composed of medium and smaller players, including converters, according to IBIS World.
Over one quarter of the industry market share, meanwhile, is owned by International Paper and Rock-Tenn, IBIS World states in its September 2013 report. “Despite a recent recovery, weak operating conditions have forced companies in the industry to restructure and downsize over the past five years, while some operators have exited the industry or merged with their competitors,” the report adds. Over the past five years, the number of establishments operating in the industry has decreased at an annualized rate of 1.9 percent.
If there is a silver lining in the recent recovery years, it’s profits. In 2012, the global cardboard box and container manufacturing industry recorded an estimated $452.9 billion in revenues. Thanks to technological investments that lowered operating costs, combined with efficiencies that have allowed for fewer workers, profit margins have begun trending upward. In 2013, revenues rose nearly 5 percent, according to IBIS.
According to AlertData.com, prices in the cardboard box and container manufacturing segment are rising at a rate of 3.44 percent on a year-over-year basis. Hoopes says the price of the industry’s primary products, corrugated and solid fiber boxes, is forecast to outpace that for the industry as a whole, except in recent months. “Over the five years to 2013, the price of corrugated and solid fiber boxes was anticipated to increase at an annualized rate of 3.3 percent, including 5.2 percent price growth expected in 2013 alone. Yet, price growth for the industry’s largest product segment was only anticipated to increase 0.6 percent in August.
In the fall of 2012, producers implemented a $50/ton price hike, followed by another increase this spring. Many buyers reeled at the second increase, according to Runiewicz at IHS.
“I didn’t think the producers had the oomph to get the price hikes through because I saw flat demand and capacity, but market share and size really does matter in this industry, Runiewicz tells My Purchasing Center. “As it turns out, this market has really changed, not much from a demand side but from a supply side. The top five producers own around 70 percent of the market. So there’s been a lot of consolidation, and with that, one will announce a price increase and others will follow. When you have the kind of consolidation in the market, with five major players, you end up where the pricing power has really shifted to the producers. And that’s the situation that’s unfolded over the past year.”
All told, the increases amounted to about an 11 percent rise in prices, Runiewicz says.
American producers can only look at other regions of the world with envy; in countries where GDP growth is robust and manufacturing is soaring in healthy, growing, and densely populated regions, cardboard makers must surely be giddy. For example, IBIS World had earlier predicted that the corrugated packaging market in developing Asian countries would approach 8 percent growth in 2013.
It could be argued that the domestic cardboard packaging industry’s bane wasn’t the recession but the continued decades-long exodus of downstream American customers – a trend that continues to mute whatever gains the industry makes in revenues and growth while feeding the consolidation binge. IBIS World predicts the number of domestic producers will continue dropping through 2018 at an annual rate of about 0.6 percent.
“Disappointingly for industry operators, the offshoring of manufacturing facilities is forecast to continue over the next five years, which will reduce domestic demand for cardboard required for packaging and transportation,” IBIS World notes in its recent report. To combat that trend, domestic producers are banking on continued healthy demand from the food and beverage industry.
But the situation isn’t entirely gloomy. Key downstream market segments in the U.S., most notably automobiles, are leading the recovery, and that is good news for producers. According to Hoopes, in fact, revenues for the global cardboard box and container manufacturing industry are forecast to increase 5.8 percent in 2014. Moreover, “despite turmoil in emerging markets, interest rates in the United States are not expected to increase until at least mid-2015, when unemployment is currently projected to fall below 6.5 precent,” he adds. “As such, capital levels are not expected to leave emerging markets and drop to a level that would substantially damage cardboard box demand in these countries in 2014.”
In addition, profits will continue heading north through 2018, with average profit margins rising from 4.4 percent in 2013 to an estimated 4.6 percent in 2018, according to IBIS World. This corresponds with modest annual revenue gains of about 1.5 percent through the same period. If consumer spending increases parallel a positive recovery as expected, so too will industrial production as it continues reaping the gains in labor productivity and lower operating costs, the firm noted.
Watch the World
Some analysts believe buyers will not look favorably on price hikes in 2014 after absorbing the two recent ones that came six months apart. Others, meanwhile, see them as inevitable. “Given price increases in recent months for the industry as a whole and for the industry’s primary products, corrugated and solid fiber boxes, price increases in 2014 are forecast to continue to outpace five-year trends,” Hoopes tells My Purchasing Center.
He believes the industry’s average profit margins will continue to benefit from declines in raw material costs over the next five years. As he sees it, the world price of wood pulp is forecast to decline at an annualized rate of 0.2 percent through 2018. “Moreover, folding boxboard production is anticipated to increase 7 percent in 2014 alone, substantially faster than 2013 projections,” he adds.
Hoopes warns buyers, however, to keep their eye on the ball globally. “In 2014, purchasing managers should be wary of any substantial declines in world GDP growth or increases in world wood pulp prices that could adversely impact industry-relevant demand and output prices, respectively,” he says.
According to AlertData.com, industry overhead costs were up around 2 percent in June 2013 over the previous year. Compared to a year ago June, overall manufacturing costs have increased 2 percent with per-unit spending on raw materials up 1.78 percent, production labor up 3.14 percent, energy up 2.28 percent; and inbound freight up 2.11 percent.
While there have been some “rumblings” about increases in production costs and chemical and pulp prices, Runiewicz at IBIS World isn’t committing to the kind of price increases seen over the past 12 months.
“The cost of materials to manufacture really have increased very slowly, and the costs of production have not increased that much,” he says. “To justify that kind of increase using the cost of production really doesn’t hold. We’ve seen a little rise in pulp prices, but compared to what they were a year ago, they’re higher, but they are much lower than what they were two years ago. The converters that buy the linerboard and corrugated medium have tried to pass these off to their buyers, and they’re kind of caught in a price squeeze now. That’s what we’ve seen.”
All that could change, however, if the U.S. experiences healthier-than-expected recovery in the new few years. “If this economy really does start to improve in 2014, and manufacturing starts to pick up a little faster, we’re going to see another announced price increase,” Runiewicz says. “They may not get another $50/ton initially, but they’ll try to push it through in stages. I do see prices increases of about 5 percent in 2014, basically because of this consolidation and ‘market share/size matters’ scenario – not so much on the supply and demand fundamentals, but a little on the demand growth side, if the economy and manufacturing does indeed grow at a faster pace.”
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.