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.
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.
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