Containerboard Industry Perspective 4th Quarter 2014

Box demand picks up

By Jesse Marzouk

After languishing over the last few years, box shipments in the U.S. picked up at the end of 2014. In each of the three months ending in November 2014, box shipments increased at an approximate rate of more than 2% over the prior year’s month. While this is not extremely robust demand, it is higher than the basically flat shipment levels experienced in recent years. The question heading into 2015 is whether or not this increase in box shipments will continue.

For full-year 2014, the export market sustained containerboard prices, as additional capacity came online in North America. Containerboard production for exports increased 6.3% during 2014, to reach a total of 4.7 million tons, the highest level since 1997.

While the U.S. is a relatively low-cost producer of containerboard, it will face a more difficult export environment in 2015. The U.S. dollar strengthened significantly against a number of currencies, including the euro, toward the end of 2014 and during the first few weeks of 2015. If the U.S. dollar holds these gains, it will be harder to compete against foreign competitors. On the demand side, exports likely will not be as strong, as the world economy is decelerating heading into 2015. Europe continues to languish amid the threat of deflation, China’s slowdown appears to be accelerating, Japan’s economy is officially in recession, many emerging market countries such as Brazil are suffering under the weight of low commodity prices, and Russia and the Middle East are suffering amid violence and the collapse of oil prices. In the short term, the U.S. containerboard market can overcome the export challenge if domestic box demand continues at a pace similar to the last few months of 2014.

Longer term, the question of additional supply threatens the containerboard market and the record margins that producers have achieved over the last few years. Additional supply comes in two forms - greenfield sites and mill conversions. A new 360,000-ton recycled containerboard mill is currently being built in Indiana by Pratt Industries and will start production toward the end of 2015. Other companies stated that they are interested in building new facilities as well. The recent decline in pricing for old corrugated containers (OCC) is a double-edged sword for current market participants. While it helps expand margins for current producers, lower OCC prices also encourage new recycled mills and conversions of machines that produce other grades, such as newsprint. Although these machine conversions are extremely expensive, the draw of current levels of profitability could be too difficult for some producers to ignore. It will be interesting to see if more producers announce new sites or machine conversions in 2015 amid the continued decline in pricing for OCC.

Jesse MarzoukJesse Marzouk is a vice president and forestry products specialist. He has appraised numerous U.S. and Canadian pulp, paper, and lumber-related companies involved in manufacturing and distribution. Jesse received his MBA in finance from Kellogg School of Management at Northwestern University, and has a degree in finance and accounting from Indiana University.