Wilde Assesses Box Making Industry - Packaging-Online

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Wilde Assesses Box Making Industry
Apr 28, 2007
Official Board Markets

In the last six months domestic demand for corrugated boxes has eased, says Mark Wilde, paper industry analyst for Deutsche Bank, New York City. He reviewed the state of the U.S. corrugated container industry at the Fibre Box Association's Annual Meeting held earlier this month in Orlando. However, he adds that offshore demand remains healthy, with European box volumes reportedly strong (see accompanying chart).

Turning back to North America, he notes that the supply situation has been steady, with Weyerhaeuser's Plymouth, N.C., 350,000 tons per year recycled linerboard mill shutdown in Feb. 2006 being offset by International Paper's 350,000 tons per year kraft linerboard mill conversion in Pensacola, Fla., scheduled for later this year.

Other key points he made include:

•Energy costs have moderated from late 2005 peak;
•By the end of this decade China's Nine Dragons will be the world's largest containerboard producer;
•Large containerboard producers have been willing and able to rationalize excess capacity. But returns have remained anemic;
•Recovering OCC and chip costs price increases will be difficult this winter;
•Operating margins on a quarterly basis will decline over the next couple of quarters;

Smurfit-Stone Container Corp. and other integrated producers will continue rationalizing box systems. Temple-Inland now has a game plan (breaking up into three businesses), but will it unfold as advertised? That's an open question;

•If Weyerhaeuser were to get out of the containerboard business it would ease its conversion into a real estate investment trust. A Reverse Morris Trust structure (like its Domtar deal) would eliminate tax leakage; and
•The global containerboard industry is increasingly skewed to OCC. But paper makers are also digging deeper into the wastebasket.

"Integrated box makers need to think more like packagers and less like engineers," he states. "Focus on selling packaging, not simply running mills. The constant debate focuses on the goal of vertical integration. Should the mills run flat out, optimizing assets, or use packaging sales to stabilize earnings? Incentives and messages to employees change constantly. Should the integrateds cut up more tonnage or sell margin/contribution?"