Impact of OCC on Price

Mill inventories are not the only drivers of price. Container board exports were up 4% in 2012 and expected to increase again in 2013. Even anemic growth in China is still growth and export demand will also have an ongoing effect on prices. OCC prices are increasing. This is a volatile market and prices move significantly quarter to quarter but the trend line is continuously upward. The OCC market will also continue to drive Liner board prices higher.

In addition to tighter supply, increasing OCC costs and the lack of virgin fiber inputs will put long term upward pressure on prices. The increased dependence on short fiber raw stocks and better paper making technology may improve the performance of paper at lower strength/basis weights off a corrugator, but understanding the performance characteristics of these components in finished boxes is another matter. Either way, it seems we will be paying more for less for some time to come.

The Price of Paper

The cost of paper increased $50.00/ton last fall. The three majors, Rock-Tenn (NYSE:RKT), Georgia Pacific and International Paper (NYSE: IP) have all announced increases for the first week of April, and IP is saying 12% on liner and 10% on boxes April 6. An announcement is not an increase, and it is unlikely that prices will move in April, but It is very likely they will get an increase of some kind during the second quarter of 2013. 

The recent wave of consolidation is giving the mills an unprecedented amount of supply side control. Mill inventories are well below the 10-year average of 4.2 weeks. In the past when mill supplies fell below four weeks it was a clear indication of price increases coming, and it was difficult for the industry to manage supply that closely. The advent of better inventory control systems has improved the ability of the mills to reduce inventories, but as we all know, shorter lead times and tighter inventories lead to increased volatility. 

Throughout the latter half of 2012 mill inventories fell below 3 weeks and stayed there. Why? Usually mill inventories are function of increasing box demand, but finished box demand was actually flat last year (359.8B sq.ft in 2012 v. 359.0 B sg.ft in 2011) so this increase was not tied to demand. For the first time in memory, liner board prices and finished box demand have decoupled. Understanding everything that drives prices in a market is impossible, but the supply side inventory control must be seen as a consequence of consolidation. Rock-Tenn’s acquisition of Smurfit Stone, International Paper’s acquisition of Weyerhauser and Temple Inland removed two of the least disciplined players from the market and has created an environment where tighter mill inventories is likely here to stay.

Your Packaging is Changing (Whether you want it to or not)

The packaging industry is in the midst of an unprecedented period of turmoil and change. The weight, performance, fiber content and cost of paper is undergoing a radical change. The advent of new technologies and unprecedented consolidation has fundamentally changed the markets for liner board and finished boxes. Worldwide demand for fiber has significantly altered the raw material inputs for the paper industry and is transforming the way packaging performs. The cost of liner board increased $50.00/ton last year and will continue to rise. 

The paper content of your corrugated packaging is changing, and it is getting harder to know just what these changes mean for the price and performance of your packaging. We are increasingly encountering new customers that describe performance issues that seem to appear “out of the blue”. Why is this happening? The simple fact is the amount of fiber in liner board has already changed, and these changes are subtle and difficult to quantify. The chart below describes the changes. These lighter liners are already in the market. 

The paper producers claim that these liners perform as well or even better because the technology used to produce the liner has improved. This may be true. Our internal testing regime has produced mixed results. The fact that corrugated sheets will perform at ECT32 off a corrugator does not mean those same sheets will deliver the same performance as the heavier ECT32 sheets we are used to running. The process of converting sheets to finished packaging impacts performance characteristics. This puts pressure on the box maker to have effective tools to measure the performance of the packaging we produce. It also forces us to carefully evaluate the performance of sheets from different suppliers, because each supplier is doing different things to get their performance up and they are not sharing these secrets. Some mills produce better paper than others.

Consequently we have invested in new testing equipment to augment our current testing program. We have to. The variety of liner board and paper combinations we encounter when working with new clients is impossible to evaluate without careful testing. Buyer beware. ECT32 is not the same old ECT32 you are used to, it could be better, but it may worse. It all depends on how you are using it.